Standing Committee A

[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)

John McWilliam: Order. Gentleman may remove jackets—I have taken mine off. I apologise for the heat in this Room; it is quite appalling, but there is nothing that we can do about it. The only air-conditioned Room in the Committee Corridor is the one that the Appeal Court judges sit in.Clause 147 De-registration

Clause 147 - De-registration

Question proposed [this day], That the clause stand part of the Bill. 
 Question again proposed.

Ruth Kelly: I am delighted to welcome you to the chair for this afternoon's proceedings, Mr. McWilliam.
 We have been debating the new registration process and in particular the provisions for de-registration and how they might be applied. The new registration process provides pension schemes with a more straightforward way of entering the tax advantage regime, but unfortunately there will always be a small number of schemes that do not play by the rules. The Inland Revenue can use a range of sanctions against such schemes. The ultimate sanction, for the most serious offenders, is to withdraw the scheme's registered status and so deny it access to the various tax exemptions. Under existing legislation, the Revenue already has the discretion to withdraw a scheme's tax approval, and this clause merely provides the equivalent power in the new regime. 
 The power would be used only where there was a flagrant disregard for the responsibilities that come with a pension scheme's tax-privileged treatment. The Government allow generous tax relief for pension schemes on the strict understanding that a scheme's funds are used only for certain purposes. If a scheme consistently or blatantly uses funds for other purposes, or fails to tell the Revenue what is happening to the funds, it is right that the Revenue should be able to apply the ultimate sanction of withdrawing tax-favoured status, subject of course to an appeal right. 
 The hon. Member for Tatton (Mr. Osborne) asked how the Revenue intends to apply the terms ''significant failure'', ''materially incorrect'' and ''substantial amount''. I freely admit that those phrases are not defined in the Bill. It would be difficult 
 to do so and would make the rules more complex. However, I can tell members of the Committee that the Revenue intends to issue guidance on the interpretation of those terms. Of course, it will only be guidance. Ultimately, it will be for the commissioners or the courts to decide whether the Revenue is interpreting the terms correctly. If the scheme administrator thinks that the Revenue is interpreting the terms too restrictively, an appeal can be made against de-registration and the commissioners will consider whether the decision to re-register is reasonable. 
 Members were interested to know at what point a scheme loses tax relief if it is de-registered. The Revenue's notification will state the date from which de-registration is effective. Any contributions, investment growth or authorised lump sum payments made before that date will benefit from full tax relief, but any occurring on or after that date will be subject to tax. There is no six-year clawback, as there is under the current regime. 
 The hon. Member for Tatton was also interested in the relationship between the Revenue's power to reclaim tax relief and de-register a scheme, and the pensions regulator and the pension protection fund. He quite rightly expressed a concern for the interests of otherwise innocent members of a pension scheme. However, de-registration would never be an automatic process. The clause merely states that the Revenue ''may withdraw'' a scheme's registration, and clause 148 sets out the circumstances in which that step may be taken. Before making a decision on de-registration, the Revenue would always take into account the circumstances of a scheme and its members. That is what happens under the current regime: the Revenue exercises its discretion before withdrawing a scheme's tax approval. The courts expect the Revenue to exercise its discretion in a way that does not cause undue damage to the interests of the members. That onus on the Revenue will continue under the new regime. 
 The Revenue expects to work closely with both the pensions regulator and the pension protection fund, subject to the statutory restriction on disclosure of confidential tax information. The Revenue already enjoys a good working relationship with the Occupational Pensions Regulatory Authority, which I am confident will continue when OPRA is succeeded by the pensions regulator. I think that I have covered all the points that have been raised.

Rob Marris: Subsection (2) talks about the Inland Revenue notifying a scheme administrator. In a situation where there is a crooked scheme administrator, the scheme administrator might be notified but we would not then move on, under subsection (3), to notify the trustees and members. That is a possible lacuna. Will the Minister make a few remarks about that?

Ruth Kelly: The relationship between the Revenue and the scheme administrators is primarily based on trust. The pension trustees are there to ensure that the scheme is operated in the interests of its members. If
 the normal notification process did not work, I would expect the Revenue to take steps to ensure that the normal processes were followed. In this particular case we are talking about de-registration and the point from which tax relief is disallowed. It would be disallowed from the point of de-registration, hence from the point at which it was notified to the scheme administrator.

Rob Marris: In a situation with a crooked administrator, the Revenue might notify that body of de-registration and, therefore, of withdrawal of the tax exemption, but because the administrator had been notified under subsection (2), the members and the trustees would not be notified under subsection (3), as that subsection kicks in only when there is no administrator.
 I am concerned about a crooked administrator who receives that notification. The exemption would be withdrawn, but the members and trustees would not be automatically notified by the Revenue because a valid notice would have been served on an administrator, albeit a crooked one.

John McWilliam: Order. Can I ask Members to speak up, please? We want to leave the doors open so that the Room will remain as comfortable as possible, but obviously there is more background noise than normal.

Ruth Kelly: Clearly, the scheme administrator has certain responsibilities that it is up to it to discharge. My hon. Friend rightly highlights provisions in the Bill for notifying other responsible members where there is no administrator. However, we are relying on the general framework of law to operate, and the scheme administrator has to discharge its responsibilities. For those reasons, I suggest to hon. Members that they support the clause.
 Question put and agreed to. 
 Clause 147 ordered to stand part of the Bill. 
 Clauses 148 and 149 ordered to stand part of the Bill.

Clause 150 - Payments by registered pension schemes

Ruth Kelly: I beg to move amendment No. 297, in
clause 150, page 136, line 31, after second 'to' insert 'or in respect of'.
 The amendment introduces a minor clarification. The clause introduces a rule on the payments that a registered pension scheme may make under the new simplified regime. It also introduces the rules for the borrowing that registered schemes may enter into. There will be a single, clear set of payment and borrowing rules that schemes must follow in order to stay within the parameters of the regime and obtain maximum tax relief for themselves, their members and sponsoring employers. They are called authorised payments, and they entirely meet the Government's 
 intention to provide generous, up-front relief for pension saving and to ensure that tax relief funds provide income for life in retirement. 
 To provide fairness and Exchequer protection and to encourage the use of tax relief funds for their intended purpose of providing an income for life in retirement, the regime provides for certain tax consequences to apply where payments are made which fall outside the authorised payments rule. They are called unauthorised payments, and we will come on to them in more detail after clause 161. In the context of the generous tax relief that will be available under the new regime, it is right that sanctions should apply where the rules are not complied with. 
 Unauthorised member payments not only cover payments that a scheme is not authorised to make, but treat as an unauthorised payment certain other transactions set out in clauses 161 to 163, which I shall turn to shortly. We need to ensure that not only are direct payments to a member treated as unauthorised member payments, but where such a payment or transaction can be undertaken in respect of a member that is caught by the unauthorised payment rules. 
 Clause 161 creates a tax charge when a member assigns his pension rights to someone else. We also want that to apply when the dependant of a member assigns a dependant's pension. The amendment enables the unauthorised payment charge in such circumstances, and I commend it to the Committee. 
 Amendment agreed to. 
 Clause 150, as amended, ordered to stand part of the Bill.

Clause 151 - Meaning of payment etc.

Ruth Kelly: I beg to move amendment No. 298, in
clause 151, page 137, line 31, at end insert
'(or who was connected with a member at the date of the member's death)'.

John McWilliam: With this it will be convenient to discuss the following:
 Government amendments No. 299 and 317 to 322.

Ruth Kelly: Our aim is to provide clear rules showing what payments a pension scheme may make which accord with our purpose of giving tax relief. Those are called authorised payments. We also want to identify clearly which payments do not accord with that purpose—unauthorised payments. The rules on unauthorised payments that are made by direct payment ensure that the effect of those clauses continue after the death of the member to which the payments relate. The amendments ensure that similar rules apply to the clauses that deem unauthorised payments to apply to transactions other than direct payment.
 As part of the pension rules, we need to make it clear what constitutes a payment. Clause 151 provides that definition and makes it clear that it includes a payment 
 of money, and money's worth. The clause also provides that assets held by those connected with members are deemed as being held by that member. The clause is an integral part of the new, clear framework and rules that will guide registered schemes through what they may or may not pay out. 
 Clause 161 ensures that where rights under registered pension schemes are assigned, the scheme is treated as having made an unauthorised payment at the time of the assignment. Amendments Nos. 317 and 318 clarify that position where it is the member's personal representative who assigns the benefits from a pension scheme. In such circumstances, the amendments ensure that the assignment by the personal representative is treated as being in respect of a member and so will be an unauthorised payment for the purposes of clause 150. 
 Clause 162 is the second of three clauses that provide for unauthorised payments to arise in specific circumstances. It sets out the specific circumstances in which unauthorised payments are deemed to arise. It deals with cases where the assets of a pension scheme are used to provide a benefit to the member, their family or their household. The new regime will provide a much freer choice for tax-favoured pension schemes over what sort of investment they make. We believe that schemes should as far as possible be left to decide, in light of market developments, their own investment strategy and choice of investment assets. The new simplified regime significantly reduces the current number of restrictions and the investments that can be held by pension schemes. 
 In the new simplified regime, a registered pension scheme may, if it wishes, invest in an asset that may be used to provide a benefit to a member of the family or household. However, if a benefit is provided in that way, clause 162 deems an unauthorised payment from the scheme to arise, which will attract an income tax charge. The clause provides for the amount of an unauthorised payment of this type to be valued for tax purposes in the same way as amounts under the existing benefit-in-kind tax legislation, which applies when an employee obtains a non-monetary benefit from their employer. 
 Clause 163 deals with a case where value passes out of the scheme without an actual physical payment being made. One way of doing that is through value-shifting arrangements. There are many ways in which value shifting might occur. To pick a simple one, a scheme might alter the terms of a lease, which increases the value of the member's asset and reduces that of the scheme. Clauses 161 to 163 apply to transactions carried out by registered pension schemes with members of that scheme and with those connected with members. 
 The amendments are designed to ensure that the clauses continue to apply to transactions undertaken with those connected with members after the death of the member. The new pension regime sets out detailed rules on what payments a registered pension scheme may make to dependants after the death of a member. It provides generous rules to enable members to provide for their dependants in a tax-efficient manner. 
 The benefits include tax-free lump sums, to be paid out if the member had not begun to receive benefits, and allow the continuation of tax benefits to be paid if the member had begun to receive them. However, the rules are designed to prevent registered pension schemes from being used purely as a method of passing tax relief funds to dependants, so they do not allow any tax-free payments to be made if the member was over 75 when he or she died. 
 The amendments are designed to ensure that those who are connected to members do not receive benefits from pension schemes after the death of the member in ways not intended by the pension rules, and they therefore protect the integrity of the rules. They narrow the rules on unauthorised payments made by cash payments and ensure that the rules related to transactions that pass value by means other than direct payment also work after the death of a member. The amendments will not affect the legitimate and generous benefits due to dependants. They are designed to ensure that the rules are not abused by unauthorised payments being made. I commend them to the Committee. 
 Amendment agreed to. 
 Amendment made: No. 299, in 
clause 151, page 137, line 34, after 'employer' insert 
 '(or who was connected with a member at the date of the member's death)'.—[Ruth Kelly.] 
 Clause 151, as amended, ordered to stand part of the Bill.

Clause 152 - Meaning of ''loan''

George Osborne: I beg to move amendment No. 292, in
clause 152, page 138, line 16, at end insert 'except in prescribed circumstances'.

John McWilliam: With this it will be convenient to discuss amendment No. 270, in
clause 160, page 142, line 29, at end add 'except in prescribed circumstances'.

George Osborne: The amendments deal with the clause that sets out the definition of a loan and the circumstances under which an unauthorised payment is made. They seek to avoid something that we think may occur. Under subsection (4), if a member or employer of a scheme is liable to make payments to the scheme but does not, the debt is considered as a loan. Subsections (4) and (5) raise the possibility that a payment due from either a sponsoring employer or a member to a registered pension scheme that simply is not paid by the time that it falls due will be treated as a loan. Clause 168 would then kick in, making it an unauthorised loan with all the consequences that would follow from that. When we discussed clause 150, the Financial Secretary spelled out some of the various sanctions and surcharges that could be applied.
 Obviously, such powers should be in place, but it does not make sense for them to be applied if the sponsoring employer simply fails by accident to pay amounts due—even though a person at arm's length would expect them to be paid promptly—and the pension scheme cannot recover the funds by the due date. We need some device, some carve-out, to avoid the unnecessary consequences of what is basically a failure by the sponsoring employer, not by the registered pension scheme. Similar comments apply to amendment No. 270 to clause 160, which deals with scheme administration payments.

Ruth Kelly: Under the new regime, registered pension schemes will be allowed to make certain loans, but other loans will be regarded as unauthorised payments and therefore subject to tax charges. For example, we recognise that pension schemes can provide a valuable source of business finance to sponsoring employers, so registered pension schemes will continue to be allowed to make such loans, but loans to scheme members do not have the same business purpose and so will not be allowed. Clause 152 sets out the rules for determining what is and what is not to be regarded as a loan for the purposes of applying the rules on loans.
 First, the clause establishes that the transactions whereby schemes purchase certain financial instruments that are publicly available or that are listed on the stock exchange will be allowed and will not come within the rules on loans. Secondly, the clause brings certain other transactions within the rules on loans. Those are guarantees provided by the pension scheme over loans made by third parties to the member or sponsoring employer and debts owed to the schemes by a member or sponsoring employer where the debt is not paid on the normal date for payment. The clause provides clarity for schemes on the treatment of certain payment and other transactions that they may wish to make. 
 Subsection (4) prevents members or sponsoring employers deferring the payment of debt to pension schemes on non-commercial terms. It does that by treating debts that are outstanding for long periods as loans that are subject to the restrictions on loans set out in the Bill. The subsection will treat such debt as a loan only if it is not repaid on normal commercial terms and will take into account the circumstances of the debtor. The subsection ensures that the schemes collect debts on normal commercial terms from members and sponsoring employers. It ensures that the funds in those schemes, which have been built up with generous tax reliefs, are protected from non-commercial transactions. 
 Amendment No. 292 seeks to include a regulation-making power, which would mean that, in certain circumstances, the provisions of subsection (4) would not apply. That might mean that certain debts would be left outstanding for unspecified periods, providing what is, in effect, an interest-free loan for the employer or member concerned. Having that rule in place is an important protection for members. I do not believe 
 that a regulation-making power to amend the commercial nature of the subsection would be appropriate. I urge the hon. Gentleman to withdraw the amendment. 
 Amendment No. 270 proposes a similar change to clause 160. It seeks to provide a power to prescribe circumstances whereby a registered pension scheme may make a loan to a member. Unlike loans to sponsoring employers, there are no commercial reasons why loans should be made to members. Sponsoring employers are closely linked to their pension schemes and there has for many years been provision for commercial loans to be made by pension schemes. We have had no representations from industry to extend the provisions to loans to members, as there is not, generally, the same business relationship. Loans to members involve an unnecessary financial risk for pension schemes. Many schemes are controlled or influenced by members and may make loans that will not be prudent investments. 
 Together, clauses 152 and 160 provide clarity for schemes on the type of loans that they can make and the treatment of them. I therefore urge the hon. Gentleman to withdraw his amendment and, if he does not do so, I urge the Committee to reject it.

George Osborne: The important point there was that the Financial Secretary said that the circumstances would be taken into account. Opposition spokesmen frequently complain about the Government taking on regulatory powers—I have just done so on the Floor of the House— but here was an Opposition amendment that would have given the Government regulatory powers.
 The reason is that we wanted to avoid a situation where unnecessary consequences flow from what is, fundamentally, a failure by a sponsoring employer, and not a registered pension scheme. We did not think that the clause was sufficiently flexible to allow that. The Financial Secretary said that all sorts of horrible things might happen. One assumes that the regulations drafted by the Inland Revenue will be sensible enough to ensure that it is rarely restricted. Nevertheless, if the hon. Lady is satisfied, and has not had strong representations from the industry, I am happy to beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Clause 152 ordered to stand part of the Bill. 
 Clause 153 ordered to stand part of the Bill.

Clause 154 - Authorised member payments

George Osborne: I beg to move amendment No. 293, in
clause 154, page 138, line 39, leave out 'and'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 294, in 
clause 154, page 138, line 39, at end insert— 
 '(ea) payments made to settle a dispute, other than payments made in bad faith; and'.

George Osborne: We are getting into the meat of the Bill. The issue of authorised member payments is just a foretaste of the debates that we will have on the forthcoming clauses. The amendments—I am talking more about No. 294 than No. 293, which is consequential—are to clause 154, which sets out the authorised payments that a scheme can make to a member. They are all sensible and people would not disagree with them. They include, for example, pensions, lump sums, recognised transfers, scheme administration payments—I may say something about that shortly—payments pursuing a pension sharing order such as divorce, and so on. The Inland Revenue provides itself with a general regulatory get-out provision in paragraph (f) under which
''payments of a description prescribed by regulations made by the Board of Inland Revenue.'' 
It would be interesting to know what the Revenue is cooking up for that. 
 My amendments would introduce a new category of payments to settle a bona fide dispute in good faith so that they would not be treated as unauthorised payments. That is a sensible let-out provision whereby an attempt to settle a dispute amicably and in good faith should be allowed to happen. The Financial Secretary may say that under the regulatory powers that the Inland Revenue is taking on itself regulations may be considered to allow bona fide payments to be made. If she says that, I will be happy to withdraw my amendment, although, in general and notwithstanding my earlier amendment, we prefer to see provisions in the Bill rather than in regulations. However, we do not want attempts to avoid costly litigation to fall foul of the restriction on authorised member payments.

Ruth Kelly: I do not think that amendments Nos. 293 and 294 are appropriate or that pension schemes should use their money to pay amounts to members to settle disputes. There are no plans for the Inland Revenue to use its own regulations to enable it to do that.
 The purpose of providing tax relief to registered pension schemes, employers and members is to encourage pension saving to provide individuals with an income for life after retirement or an income for dependants after the death of an individual. The new rules must ensure that payment schemes fit that purpose, and the clause provides a list of the payments that a registered pension scheme is authorised to make to or in respective of members. They include pensions, certain lump sums and transfers to other schemes. The various items on the list are defined in subsequent provisions. 
 The hon. Gentleman seeks to insert a new category of authorised payment to settle a dispute other than payments made in bad faith. However, his amendment does not describe what ''dispute'' means and would cover any dispute. In addition, the amendment imposes no limit on the amount of the payment; it must simply not have been made in bad faith. Our legal advice is that that would be a difficult hurdle and that the Revenue might have some difficulty in 
 demonstrating in particular cases that the test was satisfied. Quite large payments could be made for relatively minor disputes. 
 Schemes will have disputes with their members, and it is right that they should make payments to members if compensation is due to them. There is nothing in the Bill to prevent that. However, if members receive benefits from a pension scheme, it is right that they should be taxed on them, unless they are one of the specific tax-free lump sums that registered schemes offer as part of the general tax reliefs given. Amounts paid to settle disputes are also benefits being paid out of tax relief to funds and it is right that they should be taxed, as with other benefits. Similar treatment arises under the current regime when such payments are also taxed as unauthorised payments unless they fall within the types of benefit specifically allowed. The new regime merely continues the previous treatment. 
 It is completely fair to say that schemes are doing nothing wrong in making such payments, so the charge applies to schemes that are making unauthorised payments. The scheme sanction charge is not specifically applied to payments by clause 230. I therefore urge the Committee to reject the amendment, or perhaps the hon. Gentleman will considering withdrawing it.

George Osborne: Thank you, Mr. McWilliam.
Mr. Howard Flight (Arundel and South Downs) (Con) rose—

John McWilliam: Order. The hon. Member for Arundel and South Downs (Mr. Flight) is attempting to catch my eye. If the hon. Member for Tatton says the wrong words, the hon. Member for Arundel and South Downs will not be able to catch my eye. If the hon. Member for Tatton is going to give way to his hon. Friend, I will be delighted.

George Osborne: Before I withdraw my amendments, it would be interesting—

John McWilliam: Order. The hon. Gentleman nearly did it. Under Standing Orders, the utterance of the words ''withdraw the amendments'', with a clear indication that that is the intention, would force me to put the question immediately. I was raising a point of order with him, pointing out a pitfall that he was liable to fall into if he were not careful. However, I will give him the opportunity to let the hon. Member for Arundel and South Downs in.
Mr. Osborne rose—
Mr. Flight rose—

Stephen Pound: The hon. Member for Tatton showed such promise.

George Osborne: The hon. Gentleman should take off his jacket.
 I think that it is important that other members of the Committee have the chance to make a point before we decide how to deal with the amendments.

Howard Flight: I thank you for your assistance and welcome you this afternoon, Mr. McWilliam.
 An example occurred to me. I seem to recollect a major legal argument between the Unilever pension fund and its fund managers that was eventually settled with a payment to the pension scheme, but such a dispute might have been settled with a payment by the pension scheme. My point is simple. There are obviously territories of payments to members and territories of dispute payments to non-members. It would clearly be nonsense if the trustees of a pension scheme ended up making a dispute payment to non-members in trying to do their best to manage the pension scheme assets, for which they were then disqualified. I am seeking comfort that such a situation could not give rise to a problem if nothing were done about the points that we have raised.

Rob Marris: I suggest that the hon. Gentleman reads the title. It says, ''Authorised member payments''.

Howard Flight: The issue in my mind was that the transaction could be viewed as a payment on behalf of the members because it was on behalf of members' interests. I genuinely seek clarity about whether there is an issue that needs to be addressed.

Rob Marris: I suggest that the hon. Gentleman reads the clause. It says payments
''in respect of a member'', 
not some group action to which the hon. Gentleman has referred.

Howard Flight: I thank, as ever, the learned and hon. Gentleman for his assistance, and I think that he has put my mind at rest.

John McWilliam: Order. It is not Wimbledon week, but that felt like 30-love to me.

George Osborne: I am happy to pack up and go home. I would much rather be sitting in the park or in my garden. It is clear that I am not required at all. However, there is one task that only I can perform, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 154 ordered to stand part of the Bill.

Clause 155 - Pension rules

George Osborne: I beg to move amendment No. 284, in
clause 155, page 139, leave out lines 22 to 26 and insert—
 'No payment of pension other than—
(a) a scheme pension,
(b) a lifetime annuity, or
(c) unsecured pension, if the member has not reached age 80, or
(d) alternatively secured pension, if the member has reached age 80'.

John McWilliam: With this it will be convenient to discuss the following amendments:
 No. 285, in 
clause 155, page 139, leave out lines 34 to 41. 
 No. 286, in 
clause 155, page 139, line 42, leave out 
 and insert 
 '6'. 
No. 221, in 
clause 157, page 141, line 1, leave out from beginning to end of line 5 and insert— 
 'No payment of pension other than 
 (a) a scheme pension, 
 (b) a lifetime annuity, or 
 (c) unsecured pension, if the dependant has not reached age 80, or 
 (d) alternatively secured pension, if the dependant has reached age 80'. 
No. 222, in 
clause 157, page 141, leave out lines 13 to 20. 
No. 223, in 
clause 157, page 141, line 21, leave out 
 and insert 
 '5'. 
No. 229, in 
schedule 28, page 423, line 2, leave out '75' and insert '80'. 
No. 230, in 
schedule 28, page 423, line 9, leave out '75' and insert '80'. 
No. 231, in 
schedule 28, page 423, line 13, leave out '75' and insert '80'. 
No. 232, in 
schedule 28, page 423, line 24, leave out '75' and insert '80'. 
No. 233, in 
schedule 28, page 423, line 41, leave out '75' and insert '80'. 
No. 234, in 
schedule 28, page 423, line 43, leave out '75' and insert '80'. 
No. 235, in 
schedule 28, page 425, line 3, leave out '75' and insert '80'. 
No. 236, in 
schedule 28, page 425, line 6, leave out '75' and insert '80'. 
No. 237, in 
schedule 28, page 425, line 11, leave out '75' and insert '80'. 
No. 238, in 
schedule 28, page 428, line 4, leave out '75' and insert '80'. 
No. 239, in 
schedule 28, page 428, line 11, leave out '75' and insert '80'. 
No. 240, in 
schedule 28, page 428, line 15, leave out '75' and insert '80'. 
No. 241, in 
schedule 28, page 428, line 34, leave out '75' and insert '80'. 
No. 295, in 
schedule 28, page 428, line 36, leave out '75' and insert '80'. 
No. 242, in 
schedule 28, page 429, line 46, leave out '75' and insert '80'. 
No. 243, in 
schedule 29, page 431, line 1, leave out '75' and insert '80'. 
No. 245, in 
schedule 29, page 433, line 19, leave out '75' and insert '80'. 
No. 296, in 
schedule 29, page 434, line 27, leave out '75' and insert '80'. 
No. 244, in 
schedule 29, page 433, line 4, leave out '75' and insert '80'. 
No. 246, in 
schedule 29, page 435, line 35, leave out '75' and insert '80'. 
 No. 247, in 
schedule 29, page 436, line 15, leave out '75' and insert '80'. 
No. 248, in 
schedule 29, page 436, line 36, leave out '75' and insert '80'. 
No. 249, in 
schedule 29, page 437, line 4, leave out '75' and insert '80'. 
No. 250, in 
schedule 29, page 437, line 29, leave out '75' and insert '80'. 
No. 251, in 
schedule 29, page 438, line 6, leave out '75' and insert '80'. 
No. 253, in 
schedule 29, page 438, line 27, leave out '75' and insert '80'. 
No. 254, in 
schedule 29, page 438, line 34, leave out '75' and insert '80'. 
No. 255, in 
schedule 29, page 439, line 3, leave out '75' and insert '80'. 
No. 256, in 
schedule 29, page 439, line 12, leave out '75' and insert '80'. 
No. 257, in 
schedule 29, page 439, line 31, leave out '75' and insert '80'. 
No. 258, in 
schedule 29, page 440, line 24, leave out '75' and insert '80'. 
No. 259, in 
schedule 29, page 440, line 29, leave out '75' and insert '80'. 
No. 260, in 
schedule 29, page 450, line 3, leave out '75' and insert '80'. 
No. 261, in 
schedule 32, page 450, line 5, leave out '75' and insert '80'. 
No. 262, in 
schedule 32, page 450, line 25, leave out '75' and insert '80'. 
No. 227, in 
clause 177, page 151, line 36, leave out '75' and insert '80'. 
No. 228, in 
clause 205, page 172, line 27, leave out '75' and insert '80'. 
No. 263, in 
schedule 32, page 453, line 4, leave out '75' and insert '80'. 
No. 264, in 
schedule 34, page 474, line 24, leave out '7' and insert '6'. 
No. 266, in 
schedule 34, page 482, line 17, leave out '75' and insert '80'.

George Osborne: Clause 155 is one of the most important clauses in this area of the Bill. It sets out the pension rules and the terms under which payments can be made to members. The Government have set out seven rules. My amendments try to achieve two things. The first is relatively straightforward: to advance the cause of simplification, to pick up on a theme from this morning's sitting. We are trying to achieve that by merging pension rules 4 and 6 into a simple rule about the kind of pension payments that are allowable to members or dependants—there are links with amendments that affect the payment of pensions to dependants. In our view, it is more elegant to have one rule about the payment of pensions, rather than two.
 The only reason for having a separate pension rule 6 is to draw a distinction between an unsecured pension, which is available only up to a specified age of 75—we will come to that—and an alternatively secured pension, which is available only after the specified age. Our amendments would simplify matters and merge 
 the two pension rules, which we think can be dealt with at the same time. We want to help the Financial Secretary to simplify things. 
 The much larger purpose of the amendments—this is a much more substantial point—is to raise the age at which people can no longer draw down an unsecured pension from 75 to 80. This is the first of three attempts that we are going to make to deal with the annuity issue. I can see hon. Members getting excited about that. The other two attempts will be made when we deal with the next two groups of amendments, one of which deals with alternatively secured pensions. The other is a catch-all group that would remove the requirement to purchase an annuity altogether. 
 Opposition Members, the industry and more generally the public are disappointed that the Government have not taken the opportunity of these pension provisions to remove the outdated rule that prevents responsible people who have saved for their retirement and provided themselves with a pension from continuing to draw down sensibly from a pension fund and to invest the funds. There have been many attempts in this House in recent years—the Financial Secretary has rebutted most of them—to change the rules, Mr. McWilliam. Your fellow Chairman, my hon. Friend the Member for Bournemouth, West (Sir John Butterfill), introduced a private Member's Bill to try to achieve that, and my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who is taking part in a Select Committee this afternoon, tried to achieve it in 1999. That is the broader point about the requirement to buy an annuity. 
 We are discussing the cut-off age of 75. Surely there is no logical case for keeping the age at 75. As I understand it, the age of 75 was first identified in the 1988 legislation that established the upper and lower limits of retirement. It established that people could retire at 50, but by 75 they had to take on a compulsory annuity. In legislation in 1995, there was a substantial change: the compulsory annuitisation requirement was removed. By the way, there was always the possibility of taking a lump sump, which we will discuss later. The requirement of compulsory annuitisation in the 1988 legislation was removed in the 1995 legislation and people could draw down their income until they reached the age of 75. So, the age of 75 was a feature of legislation introduced by previous Conservative Governments. 
 However, two big things have changed. First, life expectancy has continued to increase—I assume that that is something that we all welcome—over the past 16 years. It has increased quite a lot, even on the Government's figures. It is always heartening to read about increasing life expectancy. The graph on page 20 of the Government's December 2002 consultation document does not provide an absolutely accurate scale on the left-hand side. However, it shows that a man aged 50 in 1991 could expect to live a further 26 years. By 2001, that increased to 28 years, and the prediction is that by 2011 it will increase to 30 years. The document does not have a table for life expectancy of women. I understand that the life expectancies of men and women are converging.

John McWilliam: Order. Although the hon. Gentleman is cheering me enormously at my age, he really must relate his comments to the 75 mark, as 74, 76 or any number either side of 75 does not really matter.

George Osborne: Thank you for your guidance, Mr. McWilliam. My point is that, when the age of 75 was introduced in legislation, life expectancy was lower than it is now. Therefore, there is a strong case for raising the age from 75 to 80, which is what our amendments seek to achieve. Of course, that was precisely the argument used by the Government in their consultation paper and in legislation for raising the minimum retirement age by five years, from 50 to 55. Indeed, the consultation document states:
 ''At the moment the tax rules permit pension schemes to allow early retirement for people as young as 50. This age was set when life expectancies were much shorter''. 
It then provides the chart. 
 If the Government raised the minimum retirement age by five years because life expectancies changed, why do they not raise the age at which one is required to buy an annuity by five years, from 75 to 80? Based on their logic, I would have thought that that was absolute, plain common sense. One can understand why 75 was chosen in 1988. I was not involved in the decision, as I was taking my A-levels at the time.

Stephen Pound: There is not much evidence of it.

John McWilliam: Order. I was chairing the Finance Bill Committee.

George Osborne: In 1988, a man aged 50 could expect to live another 25 years. Now, a man aged 50 can expect to live a further 30 years. The logic of keeping the number at 75 defeats me.
 The Government are reducing choice and flexibility by reducing the period during which people can draw down income with an unsecured pension. If the legislation goes through unamended, the potential draw-down period will decrease from 25 years to 20 years. Legislation that is supposed to increase choice and flexibility will actually achieve precisely the opposite.

Rob Marris: Will the hon. Gentleman explain to me, because I do not know, what would happen in the current situation if someone drawing down their pension dies aged 74—or, under his amendment, aged 79? What would happen to the pension pot and to the tax?

George Osborne: Either the pension, or a lump sum with a 35 per cent. tax charge, will be passed to the dependant, or something like that will happen. I shall leave it to the Financial Secretary to answer that question. Frankly, as it is all a long way off for me, I do not have to focus on such matters. I believe that my answer is right, but the Financial Secretary can correct me if it is wrong.
 Based on the logic of the Government's argument, they should use the legislation to increase the mark, if not to abolish the requirement to buy annuities. I grant that the alternatively secured pension is a chink—
 [Interruption.] It effectively does that, as my hon. Friend the Member for Arundel and South Downs says, but the requirement either to choose an alternatively secured pension or an annuity at the age of 75 is a little anachronistic, even according to the Government's own logic. At the least, they should be increasing the age to 80, which would have a similar effect to the introduction of the 75-age mark in 1988. A similar number of people would be affected. A lot of people would be taken out of the requirement to buy an annuity or an alternatively secured pension because they would die between the ages of 75 to 80. Fixing the 75-age mark in 1988 had a similar result. 
 Owing to the logic of the Government's argument set out in their consultation documents, I am extremely confident that the Financial Secretary is about to accept my amendments.

Ruth Kelly: When looking at the amendments, I rather suspected that this might turn out to be a rehash of the debate that we have had so many times across the Floor of the House about the requirement to annuitise at the age of 75. I shall deal with some of the points that the hon. Gentleman raised. He is right to say that life expectancy has risen. That was not, however, the reason that we increased the minimum pension age to 55. We did that because we wanted to encourage active ageing. We wanted people to be part of the labour force for longer and to give them more opportunity to use their skills and talents, in this place as elsewhere.

John McWilliam: Order. As someone who is actively ageing, I hope the Financial Secretary is not having a go.

Ruth Kelly: I certainly aspire to be in your position in future, Mr. McWilliam. We ought to give such opportunities to people much more widely. Far too many people are currently forced out of the labour market unduly early. We want to give them opportunities to use their creative talents to contribute to the economy, to fulfil themselves and to save more in the process, so that they can better fund their retirement when they choose to retire.

George Osborne: The Financial Secretary is talking all this guff about giving people the chance to work longer and so on. It is a mandatory requirement, which we shall come on to. She says that it has nothing to do with life expectancy, but the Government's consultation document says that the age of 50
''was set when life expectancies were much shorter.'' 
It then includes a great big chart about life expectancy. Therefore, life expectancy is the argument used by the Government for the minimum pension age. Why is it not the argument used for raising the top end of the pension range from 75 to 80?

John McWilliam: Order. The phrase, ''all this guff'' is not of itself unparliamentary, but it is certainly ungentlemanly.

Ruth Kelly: Of course, if life expectancy had fallen, we would not be in a position to advance our argument. The fact is that people are living longer and we want them to be able to use their talents and skills in the work force to contribute to the economy and to develop themselves in the process. It is only right that they should have the opportunity to do that and, while doing that, to save better to fund their retirement in future. However, the argument about the age at which they are to annuitise their income and secure an income for the rest of their lives is a completely different one. Out of every £100 that goes into someone's pension fund, £30 is Government money in the form of tax relief, designed to enable people to secure an income for the rest of their lives. We give that money for no other reason than to ensure that people are able to support themselves in retirement. We expect people, by a certain age, to avail themselves of the opportunity of an annuity.

Howard Flight: First, with the greatest respect, it is not Government money that she refers to. It is people's own money, and it is a question of whether they are allowed to keep it or not. Secondly, the age of 75 was knowingly set as being at or around life expectancy at the time. There is a sound argument for saying that, if it has risen by five years and the same principle is retained, whatever the opinion about that, the age at which people are compelled to buy an annuity should be 80, which is today's equivalent of 75. It is a valid proposition to update that aspect without sacrificing the Government's beloved but mistaken principle that an annuity must be bought.

Ruth Kelly: The hon. Gentleman should have contained himself for a moment longer because I did not even begin to address the point about the age of 75 and whether it was a reasonable assumption in today's climate. I was arguing that the minimum pension age may have been increased because of longer life expectancy, but the rationale driving the reform was that we wanted people to have the opportunity of actively using their skills and talents in the work force for longer. Part of the process of active ageing is to encourage and to enable people to stay in the work force for longer. Pensioners benefit not only from £30 from the Exchequer for every £100 in their pension pot, but from the tax-free environment, so it is arguable that the benefit is significantly greater than that sum. We could have a long debate on whether that is Exchequer money or individuals' money, but we are not here to discuss the semantics of that point.
 The hon. Member for Tatton argued that there was no logical reason for keeping the age at 75. I suggest that there is. In preparation for this afternoon's debate, I spent some time over lunch revisiting the February 2002 consultation document, ''Modernising Annuities'' to refresh my memory about the concept of mortality drag, which I know will be of interest to hon. Members. Rather than rehearsing all the arguments about mortality drag, perhaps I could merely refer hon. Members to that document, which contains a useful box explaining precisely what that is. 
 The essence of the argument is that, while annuity rates increase as people age and some pensioners believe that it is in their interests to wait for a higher annuity rate when they have a shorter time to live—insurance companies provide higher annuity rates for older pensioners—it becomes more difficult for them to obtain a similar investment growth on their investments to that offered by an annuity. In the early years of retirement, it is possible to achieve higher rates from investment funds, but in the later years of retirement it becomes increasingly difficult. Deciding where the cut-off comes is not a precise science, but the consensus today is that it is around the age of 75, just as when the matter was considered previously. 
 We certainly considered the matter in some depth when preparing the consultation document, ''Modernising Annuities''. Good financial advice today would still advise people to take an annuity at or around the age of 75. That makes good commercial sense.

Rob Marris: Does the Minister share my surprise that the Opposition's amendment seems to be more or less to force men to buy an annuity on the day before they drop dead at the age of 80?

Ruth Kelly: My hon. Friend makes his own point.
 If the intention is to pass capital on to heirs because people die before they are forced to buy an annuity, this is not the place for that debate. We had that debate, which is altogether different, on the Floor of the House. I have argued several times that that reform could cost the Exchequer hundreds of millions of pounds. I am sure that we shall return to the matter, but there is no provision for people who do not believe in the pooling of risk to take an alternatively secured pension after the age of 75, although I suggest that good financial advice would be that people take out an annuity by that age. For those reasons, the amendments are inconsistent with Government policy.

David Laws: Since the Financial Secretary has said that longevity is not a factor in setting the annuity rate at age 75, can she clarify what changes in economic circumstances or retirement age would change her view about the age that has been set?

Ruth Kelly: Clearly, if the impact of mortality drag were to change significantly and good financial advice were to suggest that 75 was no longer a reasonable assumption, that would be the time to reopen the debate. At the moment, that is not the case. There has not been a fundamental change. Good financial advice still suggests that people should buy an annuity at around the age of 75. It is the efficient way to secure oneself a decent income in retirement. Given the amount of Exchequer support for pensions, that is what we expect the money to be used for.
 The hon. Member for Tatton made a point about the simplification of the rules. The two rules, however, provide for completely different situations. One provides for unsecured income up to the age of 75, the other provides for an alternatively secured pension after the age of 75. I am advised that, as they cover 
 different circumstances, the rules could not be merged satisfactorily. If he provides evidence to the contrary, I will be willing to listen. However, on grounds of principle, I urge hon. Members to reject his amendments.

George Osborne: I am afraid that I am not entirely convinced by the Financial Secretary's arguments. She did not address a couple of my points. It had to be pointed out to her that the Government used life expectancy as a reason to raise the minimum retirement age. I know that she talks about people having a more active working life in their older age, but what the Government are talking about is a mandatory increase in retirement age by five years. They base their argument for that on life expectancy. It defeats me why the same logic does not apply to the 75 mark.
 Nor did the Financial Secretary respond to my point about the constriction of choice. Under the proposals, the period in which people can draw down unsecured income will be cut from 25 years to 20 years. That is a restriction of choice in what is supposed to be a package of reforms that increases choice and flexibility. 
 Much of the Financial Secretary's argument rested on the fact that good financial advice suggests that one should buy an annuity. That may be the case, and people are perfectly entitled to take good financial advice or not to do so. Other people may disagree with that advice. Other advisers may say, ''Go on drawing down the income, or investing it in the way that you have''.

Howard Flight: It seems strange that the Financial Secretary takes no notice of the fact that all the surveys that have been done show an overwhelming wish by those approaching 75 not to be forced to buy an annuity. Indeed, if they are doing a draw-down, they are likely to be capable of looking after their affairs satisfactorily.

George Osborne: My hon. Friend makes a crucial point, which is that we are talking about people who have been responsible enough to provide for their old age, have a pension and manage their affairs successfully throughout their life. They are not about to spend the whole lot, run out of money and fall back on the Exchequer. Indeed, in previous legislation, devices were used to protect the interests of the Exchequer by, for example, requiring people to take out an annuity that covered at least the minimum pensioner income.
 I am not convinced by what the Financial Secretary said. I think that the provision is a hangover from the past. It is a shame that she has not used the opportunity, if not to abolish the compulsory annuitisation requirement, at least to increase the age at which it kicks in from 75 to 80. Therefore, with your permission, Mr. McWilliam, I will press the amendment to a Division. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 5, Noes 14.

Question accordingly negatived.

George Osborne: I beg to move amendment No. 332, in
clause 155, page 139, line 45, leave out '70%' and insert '100%'.

John McWilliam: With this it will be convenient to discuss amendment No. 334, in
clause 157, page 141, line 24, leave out '70%' and insert '100%'.

George Osborne: We now come to two amendments to the new concept of an alternatively secured pension. It is a fairly innocuous name for a pretty radical departure from everything that the Government and the Financial Secretary have ever said about the requirement for people over 75 to buy an annuity.
 The concept of an alternatively secured pension appeared out of the blue in the second consultation paper in December 2003. It appeared without its own heading or section, and it just said in passing that 
''some religious groups have principled objections to the pooling of mortality risk and need to be accommodated by the new rules. The Government, therefore, proposes to allow pension income to be delivered after age 75 through Alternatively Secured Income (ASI).'' 
In other words, despite the debate that we have just had in Committee, the Government are actually scrapping the requirement to buy an annuity and going a long way towards what my hon. Friend the Member for Arundel and South Downs has been calling for over many years. We have trooped through the Division Lobbies on Fridays, turned up to support private Members' Bills—

Richard Bacon: And defeated the Government.

George Osborne: My hon. Friend reminds me that on occasion we have defeated the Government—on a Friday. That is not quite the same achievement as defeating a government on a Monday to Thursday, but it is still good when it happens. We have done all those things and tabled amendments in Committee sittings for private Members' Bills all to achieve something that the Government are now implementing, although they do not go far enough, hence my amendments.
 The Government say that they are introducing the measure to respond to the genuine concerns of certain religious organisations, principally the Christian 
 Brethren, who have deeply held beliefs preventing them from participating in insurance products because they involve the pooling of mortality risk. For those who are interested, the Brethren have held that view since 1828. They take their guidance from Corinthians, where we are told: 
 ''Ye are not your own for ye are bought with a price.'' 
Apparently, the Brethren have interpreted that as, ''You cannot have an annuity.'' The Book of Timothy says: 
''if any provide not for his own, and specially for those of his own house, he hath denied the faith, and is worse than an infidel.'' 
Obviously, the Christian Brethren have a bit of a disincentive to take out annuities. 
 Over the past couple of days, I read the Hansard reports of our debates on the subject, and it is clear from them and from what the Financial Secretary says that she takes a personal interest in the subject and has worked hard to find a solution to the Brethren's problem; she deserves credit for introducing the proposal. The Christian Brethren are extremely grateful. They sent a letter to my hon. Friend the Member for Arundel and South Downs, which says: 
 ''We would like to thank you, on behalf of the Brethren, for your constant support in our appeal to Ministers to obtain a pension provision that would accord with our beliefs. 
 As a result of many representations over the last six years, Ministerial direction has been given to the Inland Revenue which has resulted in'' 
the relevant clauses. The letter continues: 
 ''This scheme suits our conscience, and although we will then need to find a provider of the scheme, we are grateful for the provision in the Bill. 
 If it is opportune, and you so wished, any thanks that could be voiced to the Minister during discussion of these sections would be appreciated.'' 
We have fulfilled our duty to the Brethren by passing on our thanks. It is important to put that on the record. 
 The irony is that the Government's previous objections to helping the Christian Brethren drove the Brethren and those who supported them to find ever more complex and ingenious solutions to their problem and to getting round the objections of the Inland Revenue. In one recent piece of legislation, we came up with the idea of a retirement failsafe fund, in which people could invest their pensions, and which would be certain to provide an income at least equivalent to the minimum retirement income. That was put into a Bill promoted by my right hon. Friend the Member for Skipton and Ripon (Mr. Curry). 
 What was striking to those who followed what was happening was that the Government suddenly swept all that aside and said, ''There is a simple solution to this: we will introduce the alternatively secured pension,'' because that is what it is. By the way, it is not secured in any real sense of the word—that is a bit of a misnomer. It is unsecured income, as is income that one draws down before the age of 75. People will be able to draw down their income from the pension fund; the principal restriction, however, is that they must draw no more than 70 per cent. of what could be generated by an annuity bought for someone of the same age and sex. 
 The amendment would change the 70 per cent. to 100 per cent., so that someone on an alternatively secured income with the deeply held beliefs that we have discussed could draw down what would be available to them if they went out and purchased an annuity. 
 Of course, there is an important check; the Inland Revenue is concerned that people would dissipate their funds, so under the Bill there will be an annual check of how much is left in the pot. That will be recalculated annually. Given that, under the amendment, one could draw down a limit of 100 per cent. of what one could draw down under an equivalent annuity, and given that there will be an annual review, it would not be possible for people to fritter away their fund and fall back on the state. That is the thrust of the amendment. 
 The Government say—probably because of the 70 per cent. restriction—that alternatively secured income is likely to be an inferior choice for those who do not have a principled objection to the pooling of mortality risk. I think that they are wrong about that, and so does the industry; it could turn out to be an extremely popular alternative, and not because we are all about to become members of the Christian Brethren or because we all have a principled objection to the pooling of mortality risk. It is worth pointing out—as if it needs to be pointed out—that there is not a requirement in the legislation to be a member of one of these religious groups that have such an objection. It is just there as an option for everyone. The Government are not reintroducing the Test Acts. 
 This could be a very popular alternative to having an annuity, because of what happens when someone with an alternatively secured pension dies. If that person has a dependant, such as a spouse, the money passes to them and can be used to buy an annuity, or take an unsecured pension if they are under the age of 75, or buy another alternatively secured pension if they are over 75. There is nothing spectacular in that. However, if that person has no dependant—their spouse might have died or they might never have had one—the alternatively secured pension can go to a nominated charity or to other scheme members. In other words, a tontine can be created. That is an old concept—something is divided between the remaining members. 
 Let me give an example of how that might work that has been suggested to me by several people in the pensions industry. I could set up the Osborne family pension scheme, the only members of which are me, my wife and my two children. That is an extremely complicated financial product for me to purchase at the moment, but I imagine that providers will make them readily available and design products that make it easy for people to set them up. I set up that scheme, and when I reach 75 I take out an alternatively secured pension. Sadly, I then die, and it passes to my wife, who also has an alternatively secured pension—not least because she is older than me, so she will definitely be over 75 by this point. She then dies. Under these rules, the remaining pension pot passes down to my children, who are the two other members of the pension scheme. They pay no tax; they do not pay any 
 inheritance tax on this. It forms part of their pension pot and lifetime allowance, but it is not part of their annual allowance, so it is included in the general rules of pensions. The other thing is that they cannot touch it until they are 55. However, for the first time we have the concept of pension funds passing down through successive generations. 
 I want to be the first to congratulate the Financial Secretary on living up to the good old Tory idea of wealth cascading down through the generations. [Hon. Members: ''Hear, hear.''] I see that she has widespread support for that on both sides of the Committee. 
 I am not making some obscure point; in Financial Adviser—a magazine that I know we all read avidly—there is a huge article about how this might be available to people and the benefits that it might provide. My first question is, does the Financial Secretary accept that people can have significant death benefits as a result of taking out alternatively secured pensions? Secondly, can she explain why she chose the figure of 70 per cent. for the restriction? I imagine that she will say that that is all to do with protecting the Exchequer's interests, but how and why did she come up with that figure? We have had little explanation from the Government about the alternatively secured pension, and why it exists, and why they chose 70 per cent. What about 100 per cent.? Surely, there is sufficient protection from the facts that they will only be equivalent to what people can buy as an annuity and that there is an annual check to ensure that they do not run out of money. 
 I could have asked my third question at another time. Why can people not have an alternatively secured pension before the age of 75? Why is it being restricted to after that age, given that there are significant death benefits? 
 Fourthly, why will the basis amount—which is the phrase that the Government use to indicate the equivalent to an annuity—now be calculated by the Financial Services Authority? Why have they moved away from existing Government Actuary's Department tables, which most people seem to think work well, and which did not fluctuate every day with the annuity market? What annuity rate will the FSA use? Will it be the best annuity rate available at any one time, because we know that insurance companies sometimes have special offers, or will it be the average annuity rate? 
 My fifth question for the Financial Secretary relates to the fact that the legislation allows for a 10-year guarantee for an alternatively secured pension. If a person takes out a 10-year ASP at 75, and unfortunately dies at 80, that pension will go on being paid to their widow or widower for five more years. How is the 70 per cent. figure then calculated? Is it 70 per cent. of the amount that the deceased would have got, or of the amount that the current beneficiary will get? Is the 70 per cent. figure applied to me as a man on my death, or to my wife who is still alive? 
 The sixth important point is that the Government say in the consultation paper that the calculation of the equivalent annuity rate when the person gets beyond 75 will be based on the annuity rate of a 75-year-old. In other words, when somebody is 85, they will still be required to take out 70 per cent. of the annuity available to a 75-year-old. That is grossly unfair, as has been pointed out by, for example, the Association of Consulting Actuaries. It says: 
 ''We are unhappy with the conditions for determining the amount of the payments . . . the basis proposed is far too penal and discriminates unfairly against those who do not wish to buy an annuity on religious grounds.'' 
The ACA points out that a 75-year-old will get 70 per cent. of the maximum annuity available to them, but an 80-year-old will get only 55 per cent. of the maximum annuity, and an 85-year-old will get only 43 per cent., as the sum will still be being calculated on the basis of a 75-year-old's annuity. I am sure that the Financial Services Authority, or indeed the market, will respond to the demand for annuities from people of a greater age, but why is there a requirement to link the 70 per cent. only to the annuity available to a 75-year-old? That dramatically penalises people with alternatively secured pensions as they get older. 
 The Financial Secretary may not accept my suggestion that the issue will be widely taken up by the pensions industry, but she would be unwise not to, as I have anecdotal evidence of pensions advisers already advising people who are not members of the Christian Brethren on how to set up schemes. If her intention is to restrict this provision to people such as the Christian Brethren, having gone so far in helping them, it is completely unfair to penalise them and members of other religious groups as they get older and into their 80s and 90s and find that the alternatively secured pension becomes far less attractive. Increasing the amount to 100 per cent. would at least go some way towards dealing with that problem.

Rob Marris: The hon. Gentleman speaks with his usual eloquence. He knows far more about pensions than I do, but I fear that he does not understand annuities. An annuity is a bit like a mortgage in reverse. The income generated by an annuity is in part interest generated on the capital sum invested and in part capital. Contrary to what he suggested, if the figure went up from 70 to 100 per cent., an individual could run through their capital on their alternatively secured pension and become a charge on the state. The reason why annuity rates are better than simply investing the money in the stock market, for example, is precisely because the provider of the annuity gets all the capital and pays the individual part of the capital and part of the interest generated on the capital as an annuity. Ergo, unless one has a very incompetent annuity provider, the annual sum paid out must be higher under an annuity than it would be if the money was simply invested.
 If the amendment was accepted and the figure went up to 100 per cent., it would be, on the alternatively secured pension, a draw-down on capital as the years went by, if the person was drawing on the whole 
 100 per cent. rather than the 70 per cent., and they could, at least in theory, become a charge on the state, which is the very thing that the hon. Gentleman said could not happen.

Ruth Kelly: We have had an interesting exchange of views so far. I am pleased that we have been able to accommodate the concerns of the Christian Brethren. Challenges have been put to the Government about our policy on compulsory annuitisation from our own side, from the Opposition Benches and from within the Government. I think that we have come to a sensible, workable compromise that allows people with strong principled objections to the pooling of risk to take advantage of pension tax relief in the system without providing an incentive for others to go down that route. I will attempt to explain why.
 As the hon. Member for Tatton pointed out, the rules provide for the maximum amount that may be drawn each year, which is up to 70 per cent. of a comparable annuity. The rules ensure that the underlying pension fund assets are not depleted too quickly and that the member's pension fund may continue to provide an income throughout their retirement. The amendment would change the limit from 70 per cent. to 100 per cent. 
 That limit is one of the safeguards in the system to ensure that people who use this route have a relatively secure income. I will give an example of the impact of the amendment on the amount of income that may be available to a person who has taken the alternatively secured pension route. Where the maximum income at age 75 is 70 per cent. of the comparable annuity rate, and people take all of their fund into an alternatively secured pension at that age, 5 per cent. of the group could expect their maximum income to fall to a third of its initial value if they drew 70 per cent. of the comparable annuity each year. If the maximum annuity was increased to 100 per cent., as is suggested in the amendment, the proportion whose income would drop to a third would be 30 per cent. That is clearly a much more significant number. 
 As a Government, we have a responsibility not only to ensure that Exchequer funds are used wisely and that, as far as possible, people stay off means-tested benefits in retirement, but that people who have saved for retirement, have been cautious and have put money aside are then able to draw a decent income in retirement, without depleting their funds too early. We are talking about an extremely important safeguard in the system.

Howard Flight: I asked our own pensions adviser the same point that was raised by the hon. Member for Wolverhampton, South-West (Rob Marris) and to which the Minister has just referred. The answer that was put to me was that by moving to an annual review the issue would not arise, because it would be for the Revenue to determine how much one could safely draw down under the new scheme year by year. The basic annuity principle, which could be used to argue for the 70 per cent., can be corrected by the annual Revenue check.

Ruth Kelly: The hon. Gentleman makes a reasonable point. However, as I was about to say, that is the second safeguard in the system. Not only do we require a maximum of 70 per cent. but we require that amount to be reviewed annually, to ensure that there is a sufficient income for life. He suggests replacing one with the other. We need both safeguards in the system to protect the security of people's income in retirement.
 Perhaps we should consider for a minute why people choose to defer taking an annuity when good financial advice suggests that they should annuitise by the age of 75. Most people think about deferring the buying of an annuity. Before I come on to that, I would like to point out to Committee members that two thirds of all pensioners buy an annuity immediately on retirement, and the vast majority, 95 per cent., bought an annuity—I think—by the age of 70. Therefore, the category that we are talking about has a small number of people. Those who seek to defer buying an annuity till the latest possible moment are really trying to think of a way of using their pensions tax relief to support passing down the pension fund to subsequent generations. In other words, it is a tax-privileged form of the inheritance being passed from one generation to another. The hon. Member for Tatton suggests that somehow the alternatively secured pension can provide another route for that to happen. He gives the example of the Osborne pension fund, which has been set up for him, his wife and his dependants, and suggests that that may be an attractive vehicle for passing money down through the generations, to a large extent at the expense of the Exchequer.

Rob Marris: Is the Financial Secretary aware that in Victorian times the tontine was a staple of detective stories? The question was who the last man—and it usually was a man—standing would be. People tended to get knocked off along the way so that someone could get the pot at the end of the rainbow.

Ruth Kelly: My hon. Friend makes an excellent point. Even if the financial advice was 100 per cent. on this matter, there would be other factors to be taken into consideration before families chose to go down this route. I do not believe that the alternatively secured pension rules allow funds to be returned to non-dependants in a tax-favoured manner. If the member dies with a living dependant, the remaining funds must be used to provide the dependant's pension and, of course, the original person benefiting from the pension is likely to have drawn down some of that limit, subject to the £1.5 million lifetime allowance. If there is no dependant, the fund can be returned to the scheme for the benefit of other members or paid to a charity nominated by the member before his death. Otherwise the funds would be a windfall to the scheme and taxed as such, and could be taxed again on distribution.
 I think that the hon. Member for Tatton was arguing that his dependants might benefit from the pension fund in the future. The death of the last dependant is an extremely unpredictable event—one hopes that they will not die prematurely, as my hon. 
 Friend the Member for Wolverhampton, South-West suggests. The inherent risks in such a strategy make it extremely unlikely that good financial advice would suggest following that route. 
 We have made this concession because people hold significant, principled, religious objections to the pooling of mortality risk. We will keep the matter under review and check to see whether abuse is occurring. We stand ready to make any changes that are needed to preserve the integrity of the tax system.

George Osborne: The Financial Secretary is defending her alternatively secured pension scheme, but is saying that what I suggest is not a good thing for people to choose. People will make their own judgments about that. Certainly, the industry is jumping all over the measure at the moment. I heard the threat at the end of her remarks: the Inland Revenue will keep this under review. It is a shame to take that tone, because the option may be a very popular one and we should not restrict it.
 My hon. Friend the Member for Arundel and South Downs dealt with the point about the 100 per cent. There is the annual check. The Financial Secretary says that there are two checks. One check would work: the annual review to ensure that the person is not dissipating their fund. Of course, we are talking about a level of up to 100 per cent. People do not have to take 100 per cent. every year; they may take much less. 
 The Financial Secretary did not deal with my point about why the scheme has to be based on the annuity that a 75-year-old could buy—I do not blame her; she responded to many points. She might want to respond to that if she gets a chance. Even if she wants to restrict the scheme to people such as the Christian Brethren, that provision seems to make the scheme deeply unattractive to them, because the older they get, the poorer they will become. I am not sure that that is fair or necessary to protect their fund because, to put it bluntly, the older they get, the more likely they are to die. 
 Why is the Financial Services Authority given a new role? Why not use the existing GAD tables? Will the FSA use the best annuity rate available, or the average rate, or will it change every day, month or year?

Ruth Kelly: I am happy to deal with both those points. I should have dealt with them earlier. Why is the annuity rate for a 75-year-old used for these purposes? It is to do with the impact of mortality drag. I urge the hon. Gentleman to read the section on that in the earlier consultation document. It is essential to fix the income at 75, or at least at some age, because of the impact of mortality drag. If the rate is increased with age and there is no mortality pulling, the income will fall and the funds will deplete. The annuity rate being fixed at a particular age is an essential part of the system.
 The FSA provides continually updated comparative tables of annuity rates. Most of the rates are currently available in the market, freely accessible, well 
 understood and easy for individuals and providers to use. The regulations make it clear how to use the relevant annuity rate from those tables. The best rate in the tables will be used in these circumstances, which I am sure that the hon. Gentleman will think is right. I hope that I have reassured him on both those points.

George Osborne: I asked another question about guaranteed alternatively secured pensions and whether the 70 per cent. is calculated against the annuity of the person who died or the one who survived.

Ruth Kelly: It is the dependant's income.

George Osborne: That is useful.
 This has been a useful debate on a brand new concept from the Government. There is a difference between us as to how widely this provision will be taken up and how attractive an option it is, and so on, and there is a disagreement about what percentage of equivalent annuity people could take. I suspect that future Finance Bill Committees, on which all Committee members may be privileged enough to sit, will return to this subject time and again, but I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

George Osborne: I beg to move amendment No. 333, in
clause 155, page 139, line 46, at end insert—
 'Pension rule 7
 Notwithstanding anything to the contrary in the above pension rules, unsecured pension may be paid to a member who has reached the age of 75 in respect of a money purchase arrangement except in prescribed circumstances.'.

John McWilliam: With this it will be convenient to discuss the following amendments:
 No. 335, in 
clause 157, page 141, line 25, at end insert— 
 'Pension death benefit rule 6 
 Notwithstanding anything to the contrary in the above pension death benefit rules, dependant's unsecured pension may be paid to a dependant who has reached the age of 80 in respect of a money purchase arrangement except in prescribed circumstances.'. 
No. 339, in 
schedule 28, page 423, line 1, leave out 
 'and ends before the member reaches the age of 75'. 
No. 340, in 
schedule 28, page 423, line 9, after '75', insert 
 'or if the member has reached that age except in prescribed circumstances'. 
No. 341, in 
schedule 28, page 423, line 13, at beginning insert 'in prescribed circumstances and'. 
No. 342, in 
schedule 28, page 423, line 24, at beginning insert 'In prescribed circumstances'. 
No. 343, in 
schedule 28, page 423, line 41, after 'reaches', insert 'in prescribed circumstances'. 
No. 344, in 
schedule 28, page 428, line 3, leave out 
 'and ends before the member reaches the age of 75 or dies'. 
No. 345, in 
schedule 28, page 428, line 11, after '75', insert
 'or if the member has reached that age except in prescribed circumstances'. 
No. 346, in 
schedule 28, page 428, line 15, at beginning insert 'in prescribed circumstances'. 
No. 347, in 
schedule 28, page 428, line 34, after 'reaches', insert 'in prescribed circumstances'. 
No. 331, in 
clause 270, page 220, line 34, at end insert 
 'except that with effect from the date on which this Act receives Royal Assent no member of any pension scheme described in sub-paragraphs (a) to (g) of paragraph 1(1) to Schedule 34 will be required to buy an annuity on reaching any age and such a member may instead elect for income withdrawal (and Chapter 3 and Schedules 28 and 29 will have effect accordingly in such cases with effect from 6 April 2004).'.

George Osborne: This is my third attempt to deal with annuities today, and I have to confess that it is not particularly elegant, because we could not be bothered to draft lengthy amendments that would remove the requirement lock, stock and barrel, as my hon. Friend said, to get an annuity at 75, notwithstanding the debate that we have just had about alternatively secured incomes. It is inelegant because we simply included a catch-all new rule, saying:
 ''Notwithstanding anything to the contrary in the above,''
 someone over 75 can have an unsecured pension. In other words, they do not have to buy an annuity. 
 As I was going through it late last night, I discovered a couple of inconsistencies, which were partly the result of our assuming, perhaps over-optimistically, that our point on age 80 would be accepted—it was not—and that we would manage to simplify the Bill by merging pension rules 4 and 6, which we failed to do. 
 With those apologies to the Committee, let me briefly run through the broad annuity argument. As I said, we have already heard it in a couple of forms today. It has been advanced not just by Opposition Members in a series of private Member's Bills but is also supported by, among others, the right hon. Member for Birkenhead (Mr. Field), who was appointed the day after the general election in 1997 to be the great pensions and welfare guru. 
 I sometimes think that the Labour party wants to forget that fact, but those of us who were watching TV at the time and had had our 10 Downing street passes rudely confiscated at about 3 in the morning saw that, along with the appointment of the new Cabinet, there was also the appointment of a Minister of State, the right hon. Member for Birkenhead. A great deal was made of it at the time. Actually, more was made of it than of any Cabinet appointment. Of course, he subsequently fell out of favour with the Government for telling them some blunt truths and, as the hon. Member for Yeovil (Mr. Laws) reminds us, he fell out of favour with the Chancellor. The right hon. Member for Birkenhead supports the removal of the requirement to buy an annuity. 
 I shall not detain the Committee with the basic argument, which we have already heard at length. Is not it time that the House of Commons and the Government recognised that people who have been 
 responsible enough to save for their pension during their lifetime should be trusted to choose the method of funding their retirement that suits them best?

Rob Marris: Can the hon. Gentleman tell the Committee exactly how much that would cost in forgone tax revenue?

George Osborne: I do not think that it would cost anything in forgone tax revenue. This goes to one of the points that I made earlier about the inelegance of the amendment, which I freely accept. In previous attempts, efforts were made to guarantee the position of the Exchequer by, for example, requiring people to take out an annuity that would cover the minimum pension income, so there would be no cost to the Exchequer. In the Bill, the Government have tried to move away from the blanket requirement to purchase one kind of annuity at age 75, not just with alternatively secured income but also with short-term and value-protected annuities, thereby undermining many of their arguments against removing the requirement for compulsory annuitisation.
 The Government argue that the measure would benefit only a small number of better-off people; we heard some of that in the last debate. For a start, the number of people is growing all the time. The Government say that only one in 20 pensioners would benefit, but the number will rise as more and more people move into money purchase schemes. Moreover, even if the measure were to help only better-off pensioners, that is hardly a knock-down argument, provided that there is no cost to the Exchequer. Schedule 34, which we will debate later, is a lengthy schedule designed to protect people who have more than £1.5 million in their pension pot. The Government have consulted and gone to great lengths to help people who, by any definition, are the wealthiest in society. 
 The Government's second argument is that only annuities provide certainty of income. Of course, Equitable Life has destroyed that argument, as its annuity rates have been savagely cut. Then there is the risk of poor returns from annuities. It is worth reminding ourselves that a £100,000 pension pot that would have provided a £10,000 annuity in 1990 now provides an annuity closer to £4,500. 
 The Government's third argument is that removing some people from the annuity market will undermine the annuities available to the rest of the population. That is something that the Financial Secretary argues occasionally. It is a dubious, socialist argument at the best of times that everyone must be in the pot to help everyone else, but some of the provisions introduced by the Bill will undermine that, including the alternatively secured pension—we disagree on how much take-up there will be of that—short-term annuities, value-protected annuities and so on. 
 The fourth argument is that pensions are not designed to allow people to pass funds down through generations because that is not why tax relief is provided. Again, that is undermined by what the Government are starting to do and by alternatively secured pensions and value-protected annuities. 
 The Government have presented an ideological brick wall to any relaxation of the rule about compulsory annuities, and that wall is now cracking with the alternatively secured pension, short-term annuities and value-protected annuities. To paraphrase the late, great Ronald Reagan, it is time to tear down that wall.

Ruth Kelly: We have again heard a speech about whether there should be a requirement to take an annuity at the age of 75; I have heard the argument many times. When I first heard it made relatively persuasively by the Opposition and the Retirement Income Reform Campaign, I was persuaded that there was a case to consider and I considered it in great depth. I listened to their representations favourably but decided that it was impossible to accommodate them without severe detriment to 95 per cent. of the population.
 The argument is not about whether it is possible to accommodate wealthy people in their retirement choices. It is about whether it is possible to accommodate them without doing damage to the 95 per cent. who remain in the previous system. Every proposal that I have heard from the Opposition and outside interests has been framed in such a way that the vast majority of the population would be forced, for the first time, to take out an index-linked annuity at age 65 to enable the top 5 per cent. of the population to have freedom for any surplus income that they may have available above the level which would see them float off means-tested benefits. Requiring the vast majority of the population to take out index-linked annuities at 65 would be a huge restriction on individual choice and would have untold consequences for the gilts market, which could not accommodate people being forced to take out index-linked gilts at 65.

Howard Flight: The Financial Secretary may not have taken on board the fact that one of the main reasons for our policy moving towards linking the basic state pension to earnings is so that it will reach the level of the minimum income when the obligation to buy an annuity could be abolished without the hassle that she has just described. If her colleagues were to join us in that commitment, the amount of the modest annuity commitment to ensure that pensions were at the minimum income level would become less and less each year.

Ruth Kelly: We are certainly not in that position at present, and perhaps I should not spend too long discussing a policy that the hon. Gentleman's colleague has described as wildly opportunistic and uncosted. I can give him the reference if he chooses.
 The second argument against the policy is that, given the amount of unused tax relief in the system, particularly for higher rate taxpayers, any additional incentive for higher rate taxpayers to pass their pension funds down through the generations could have significant behavioural effects and would mean 
 that more was saved in pensions than is currently the case. Inland Revenue estimates suggest that that could cost hundreds of millions of pounds. 
 The Opposition's proposals would not only be to the detriment of the vast majority of ordinary pensioners, but cost the Exchequer hundreds of millions of pounds. We have had a quick run through of the arguments. I do not think that now is the time to develop them further. 
 I urge the Committee to reject the amendments.

George Osborne: We go through the boxing rounds: we make our case, and the Government reject it, but each time we get somewhere. We argued for several years for something to be done to help the Plymouth Brethren and time and again we were told that that was not possible. Out of the blue, the Government conceded on that point.
 I think that the Government are slowly coming to terms with the fact that there needs to be much greater flexibility on annuities. I remain confident that, over time, we will win our case and persuade the Government—if not this one, a future Conservative one—about the issue. I would mention one of my amendments, but I cannot read what I have written. [Interruption.] Perhaps my hon. Friend the Member for Arundel and South Downs has an important intervention to make. [Laughter.]

John McWilliam: Order. Just because the hon. Gentleman has learned to make sure that his eyes are going over his colleagues while he is speaking, does not mean that hon. Members should mock him.

Howard Flight: I thank my hon. Friend for his politeness. Amendment No. 331 is, in essence, a probing amendment. It relates to all that has been talked about. It is important because, when the Government produced their Green Paper, they promised that they would implement the changes this year. They will not be implemented until 2006.
 The Government have included in their measures the new, alternatively secured pension. The purpose of the amendment—in which, I admit, the wording includes a slight contradiction about whether the relevant date is the date of Royal Assent, which it should be, and not the beginning of this year—is to propose that that arrangement be put into effect from the date of Royal Assent. 
 The amendment also refers to the changes that we have talked about, which do not look like they will be included in the Bill. Certainly the Government's own alternatively secured pension will be included. We feel that the Government have a moral obligation to act because they said in the Green Paper that they would do something about the annuity issue. This is what they have done. The proposals in the Green Paper are relatively close to the proposals in the Bill, but suddenly it will be two years later. Many people are extremely upset that they will not be able to do what they want to do following the enactment of the Bill.

John McWilliam: Order. That was a bit long for an intervention.

George Osborne: It was, however, very helpful. It would be good to hear what the Financial Secretary has to say in response, but she is looking blankly at me. Therefore, we need to make the point that we do not believe in compulsory annuitisation, even with the concession of the alternatively secured pension. We wish to push our amendment to a division.
 Question put, That the amendment be made:—
The Committee divided: Ayes 3, Noes 14.

Question accordingly negatived.

Ruth Kelly: I beg to move amendment No. 300, in
clause 155, page 140, line 7, after 'person' insert 'first'.

John McWilliam: With this it will be convenient to discuss the following:
 Government amendment No. 301. 
 Amendment No. 217, in 
schedule 28, page 421, line 25, after 'that', insert 
 ', except to the extent permitted under this Act, the Pensions Act 1995 or otherwise'. 
Government amendments Nos. 302 and 303. 
 Amendment No. 218, in 
schedule 28, page 421, line 33, after 'payable', insert 
 'or be reduced where the provisions of the registered scheme so provide or, in any event'. 
Government amendment No. 304. 
 Amendment No. 219, in 
schedule 28, page 422, line 4, at end add 
 'or that the reduced rate applies from the date the member starts to receive a pension from the state'. 
Government amendment No. 305. 
 Amendment No. 268, in 
schedule 28, page 426, line 43, after 'that', insert 
 'except to the extent permitted under this Act, the Pensions Act 1995 or otherwise,'. 
Government amendments Nos. 306 to 308. 
 Government amendments Nos. 326 and 327. 
 Government amendments Nos. 362 to 366.

Ruth Kelly: The amendments relate to the definition of a scheme pension, one of the key elements of which is that it will provide a stable, predictable stream of income for the member's life and, after that, for their dependants. The general rule is that scheme pensions must be payable until the member's death and may not
 be reduced or stopped, except in limited circumstances specified in the Bill. The amendments seek to extend those circumstances.
 The purpose of amendments Nos. 217 and 268 is to allow the scheme pension of a member or a dependant to be reduced or stopped where it is permitted under the Pensions Act 1995, or otherwise. The Act applies to occupational pension schemes and would, for example, permit a set-off against a member's pension to discharge an obligation due to the scheme arising from a member's fraud against the scheme. However, because the Act is relevant only to occupational schemes, different rules for occupational and personal pension schemes could be created, whereas the aim of simplification is, as far as possible, to bring the rules for these schemes into line. Furthermore, the amendment allows for reductions in scheme pensions permitted by the 1995 Act, or otherwise. I am sure that in this context the words ''or otherwise'' could allow pensions to be reduced or stopped in almost any circumstances, which is precisely what the scheme rules aim to prevent. A scheme pension should provide the member with a predictable stream of income. 
 Amendment No. 218 and Government amendments Nos. 300 to 304 would allow pensions that were previously paid on ill-health grounds to be reduced or stopped where the scheme rules provide. I have listened to representations from pension bodies saying that the condition in the Bill that would allow schemes to stop such pensions is too restrictive. The Government amendments address those problems and will allow schemes to stop the payment of such pensions until the member reaches the minimum pension age, where they have recovered sufficiently to the extent that they would no longer meet the scheme's terms of providing that pension. 
 Although I accept the purpose of amendment No. 218, it would unnecessarily complicate the scheme pension rules by providing two conditions for stopping ill-health pensions: first, where the scheme rules permit, and secondly, where the member provides medical evidence. It is not necessary to provide the second condition. Schemes may include it in their rules, if they wish to do so. The Government amendments, however, address the concerns of pension bodies and provide a single condition that will allow for ill-health pensions to be stopped or reduced. They also clarify that the entitlement to a pension paid early on grounds of ill health which is stopped because the member recovers occurs when the member first starts to draw the pension and not when the pension starts for the second time. 
 Amendments Nos. 218 and 219 and Government amendments Nos. 301 to 308, 326 and 327 are all designed to allow pension schemes to pay additional amounts as scheme pensions until the member reaches state pension age, at which point the scheme may reduce the amount of pension paid. Such pensions are known as bridging pensions, and schemes provide that facility under the current regime. It allows the pensioner's income to remain broadly the same throughout the retirement. We do not want to prevent 
 schemes from continuing that practice under the new simplified regime. The amendments also apply that facility to a dependant's scheme pension. 
 I accept the purpose of amendments Nos. 218 and 219, but the amendments go too far because they would allow a scheme pension to be reduced by any amount when the member starts to receive their state pension. The idea behind schemes paying the additional pension until state pension age is that the pensioner's income remains broadly constant throughout the period. I can see no reason, therefore, for providing for the pension to be reduced by any amount. 
 The Government amendments allow bridging pensions to be paid but will ensure that the amount by which the scheme pension is reduced is limited to the amount of the state pension. Government amendments Nos. 362 to 366 are required as a consequence of allowing bridging pensions. The amount of the tax-free lump sum the member is entitled to draw is based on the valuation of their scheme pension. Allowing pensions to be reduced at state pension age creates an opportunity for the rules to be manipulated to increase the amount of the tax-free pension commencement lump sum that may be drawn. That is clearly not the intention of the provision. Amendments Nos. 362 to 366 provide that where the main or sole purpose for a scheme providing a bridging pension is to create or augment the tax-free lump sum, the lump sum will be treated as an unauthorised payment. 
 I agree with the intention of some of the amendments tabled by the hon. Member for Tatton, but I have explained that the points raised are better addressed by Government amendments. I therefore hope that the hon. Gentleman accepts the case that has been made.

George Osborne: I welcome the Government amendments because they mainly replicate the amendments in this group that I had tabled. Sometimes in opposition one has to be satisfied with moral victories in Committee—sometimes one actually gets one's way—and it is very rare that the Government accept the wording of the amendments that we draft. That has happened to me only once or twice, but quite often we table amendments, and the Government either beforehand—I do not know the process—or when they draft their response to our amendments, realise that we are making a lot of sense.
 As the Financial Secretary said, my amendments would achieve the same purpose as the Government amendments. Amendment No. 219 would allow bridging pensions to continue. As the hon. Lady explained, such pensions reduce once someone reaches the state retirement age and receives a state pension. They were originally prevented in legislation, and she did not make it clear whether that was a mistake or a deliberate policy decision that has now been changed having listened to the industry. We shall see about that. Nevertheless, I am glad the Government have seen sense and tabled their amendments, not least 
 because there would have been a massive impact on the pension schemes that offered bridging pensions and their funding. 
 Amendment No. 218 would allow some schemes to provide for ill-health pensions that are suspended or reduced when income is earned, which would have been prohibited by the Bill if the Government's amendments were not made. 
 The Financial Secretary might talk about ill health when she concludes this part of the debate. Ill health as defined by the Government in schedule 28 is effectively an inability to do one's own job—the ''member's occupation'', as described in paragraph 1. However, some schemes are even more restrictive and allow an ill-health pension to be suspended because a person is capable of any remunerative employment, rather than of continuing with their old employment. Have the Government examined that? Are they aware that as a result they will cut across the bows of some existing pension schemes? Have they consulted those schemes and what will be the impact on them? 
 My amendments Nos. 217 and 268 state that a person may be suspended in a range of circumstances including defrauding an employer, as covered in the Pensions Act 1995. My amendments refer to that excellent Act for the avoidance of any doubt. The Financial Secretary has anticipated the main thrust of my amendments, borrowing the doctrines of pre-emptive action and stealing Tory policies from the Prime Minister, and I am therefore happy not to do anything. 
 Amendment agreed to. 
 Clause 155, as amended, ordered to stand part of the Bill. 
 Clause 157 ordered to stand part of the Bill.

Schedule 28 - Registered pension schemes: authorised pensions—supplementary

George Osborne: I beg to move amendment No. 216, in
schedule 28, page 421, line 14, leave out subparagraph (1).

John McWilliam: With this it will be convenient to discuss amendment No. 267, in
schedule 28, page 426, line 31, leave out subparagraph (1).

George Osborne: The amendment is designed to remove a strange requirement that schemes with fewer than 50 members must purchase annuities to secure their pensions. First, it is strange because it is not in any of the consultation documents, and I do not think that views from the industry have been sought on what will be a very significant change to the way in which smaller pension schemes do business. Why has the requirement for schemes with fewer than 50 members to secure pensions by purchasing annuities appeared?
 Secondly, it is a strange requirement because there is no explanation for the new policy in the explanatory notes; there is simply a statement of fact. There is no 
 attempt in the notes or in any Government consultation document to explain why the requirement is in the Bill. I have not heard a word from the Government about the problem that they seek to address. Is it about member protection and therefore an issue for the Department for Work and Pensions? This morning the Financial Secretary relied on the distinction between the role of that Department and the Inland Revenue. We know from debating the Pensions Bill that member protection is a function of the DWP. 
 I do not know whether the issue is one of member protection; that was my guess. Why the magic number of 50 members? There are perfectly well managed schemes with fewer than 50 members and desperately underfunded schemes with more than 50 members, so where does the figure come from? I have a hazy recollection of tabling a written question to the Financial Secretary before the recess, asking how many schemes have 50 or fewer members, because we have no information on which to base the change that we are being asked to make in Committee. 
 Thirdly, the requirement is strange because it could lead to some odd situations. What happens when a scheme suddenly gets its 50th member? Presumably, 49 of the pensions are secured as annuities, and the 50th is not. What happens if a member dies and the scheme suddenly falls below 50 members? Presumably all the pensions suddenly have to be secured. That situation will be fairly common. A new company might set up and start a new scheme. Over time, the company would grow, get more than 50 employees, and cross the threshold. Equally, there are schemes gradually withering on the vine as members die off, and they will fall below 50. That will not be unusual. How many schemes are affected by the measure? 
 Will the annuities with which the pensions are to be secured be bought in the member's name, or in the trustees' name as a scheme investment? As I understand it, buying out pensions in payment prejudices the statutory priority of a scheme winding up. What are the consequences of that? What will be the burden on the schemes? There has been no consultation; the Treasury did not float the idea in its two fairly comprehensive consultation documents. Buying annuities can be expensive, and it may not be convenient for a scheme suddenly to dispose of all its assets. What will the impact be? Until we are surer that the Government have thought the matter through, I will be tempted to press the amendment to a Division.

Howard Flight: In looking at pension fund problems, I have perceived that a pension fund that may be solvent—according to the assessment of the actuary—on an ongoing portfolio basis may not be able to meet its commitments if it is obliged to buy annuities over the year. There is an important financial point: generally, there is a large difference between the funding required to annuitise all commitments and that required by the ups and downs of markets on an ongoing basis.
 What struck me about this extraordinary requirement was that it will do immense damage to many smaller final salary schemes. If they are obliged 
 to fulfil the requirement, their members will be locked into a much lower pension than they might have had on the basis of an ongoing portfolio.

Ruth Kelly: I note the points made by the hon. Members for Tatton and for Arundel and South Downs, and also the strength of feeling on the subject. Let me deal with some of the lesser issues before I come to the substance.
 The amendments would remove the requirement for small schemes to secure a scheme pension, or a dependant's scheme pension, through an insurance company. A scheme pension should be secure for the life of the member. That might not be achieved if the scheme is small, as the small number of members means that the scheme runs an increased risk of a significant number of members living longer than expected. 
 The cost of annuitising pension benefits for pension schemes with less than 50 members, as opposed to paying benefits directly from the scheme, will vary from case to case. Relevant factors will be the level to which scheme benefits are funded and the relative ages and benefit entitlements of the scheme members. The amendments suggest that the proposed new requirement will impose an additional cost on pension schemes with fewer than 50 members, but it is far from clear that that will necessarily be the case. 
 When an insurance company provides the scheme pension, it will be necessary for the entire purchase price to be paid from the scheme to the insurance company, either as a one-off sum or in a series of payments. However, where the scheme itself is paying the pension, cash injections may be required from the employer to ensure that the pension is payable for the lifetime of the member. So in the long run, the insurance company route may cost no more—or may indeed be cheaper—than the in-house pension route. The relative costs of a scheme pension provided by an insurance company and an in-house pension would depend on the exact circumstances of each small pension scheme. 
 Where benefits are fully funded, buying out the promise through an insurance company should require little, if any, additional cost and will cap the employer's liability while providing security for the members. However, where benefits are not fully funded and the scheme membership is homogeneous, providing a scheme pension through an insurance company might have a cost—but then so would paying the scheme pension in-house. 
 Generous tax relief is available for pensions saving, and it is right that pension funds are used for the intended purpose of providing a pension for the life of the member. The concern that small schemes may be unable to provide this guarantee is addressed by the requirement for them to insure members' pensions. 
 The requirement also prevents collusion between the scheme and the member to allow the member to draw an inflated tax-free lump sum by promising a high pension with no intention of actually funding for that. The amendments could therefore reduce 
 significantly the security of some scheme pensions. I will come back to the point about whether this is the right measure in which to provide that security. 
 The hon. Member for Tatton asks, why 50? It is not possible to say precisely what size of scheme would provide a large-enough pool for funds to be protected if, for example, all the members lived longer than expected. That might depend on a range of factors, such as the gender of the members or the type of occupation. However, we can say that it is very unlikely that a scheme with fewer than 50 members would be of sufficient size adequately to pool the mortality risk of the members. Therefore, there is a real security and protection issue for members.

George Osborne: What evidence does the Financial Secretary have for what she has just said about these small schemes being unable to secure the pensions of their members? Does she have many examples of smaller schemes failing to provide the pensions required? Are there small schemes in which everyone suddenly lives to the age of 110? What is the evidence base? One of the points that I made is that there does not seem to have been any consultation, and there is no information on this or any facts on which we can base these judgments.

Ruth Kelly: Clearly, there is a judgment to be made. Although 50 is a relatively arbitrary figure, we believe that it is very unlikely that a scheme with fewer members would have sufficient numbers to be able to pool that longevity risk. If the figure is above that, schemes still may not be able to pool it, but the likelihood that they will be able to do so is greater.
 The hon. Gentleman asked about when the membership of a scheme drops from 50 to 49. He wondered whether the scheme would have to buy an annuity for the remaining members and so forth, and he pointed out potential anomalies. I assure him that if the number of members were to fall from 50 to 49 we are satisfied that there would be adequate mortality cross-subsidy to ensure that the pensions of the remaining members could be paid. If, when a scheme pension first began to provide benefits, the number of members was 50 or more, we would be happy for the scheme to continue to provide benefits payable by the scheme administrator or an insurance company even where the number of members subsequently fell below 50. 
 The hon. Gentleman also asked how many pension schemes approved by the Inland Revenue have fewer than 50 members. I answered that in a reply to a parliamentary question this week, which he can refer to later. Although we do not have precise figures held centrally, the 11th survey of the Government Actuary, which covered occupational pension schemes with two or more members, suggests that between 86,000 and 98,000 pension schemes approved by the Inland Revenue might have fewer than 50 members. 
 I turn to more substantive points, and I hope that I can alleviate some of the concerns that have been raised. I understand that there is an argument that the 
 Department for Work and Pensions should have some role through its requirement to ensure the protection of scheme members. I also recognise that the DWP is in the process of making changes to its rules on scheme funding requirements and that, together with the pension protection fund, it should protect the pension funds of some small schemes. However, we are not yet in a position to know exactly what those protections should be. 
 I will, however, give a commitment to the Committee that once that has been fully decided and those rules are in the public domain, we will examine this again to see whether there is any overlap of regulation, and whether this is the appropriate way to ensure that members of smaller schemes are protected against longevity risk. In the meantime, I suggest that the provision remains in the Bill. We will be in close liaison with the DWP to ensure an appropriate degree of harmony between the different proposals. On that basis, I suggest that the hon. Gentleman consider withdrawing his amendment.

George Osborne: The problem that we on this side of the Committee face is that we are not in a position to judge whether such protection is a good or a bad thing, or whether it is necessary. As I said earlier, I sat on the Standing Committee on the Pensions Bill for week after week, and there was no particular focus on small schemes; that Bill was almost entirely about member protection. There was no debate about schemes with 50 or fewer members; indeed, many of the schemes that we talked about, such as Allied Steel and Wire, were very large.
 We are not in a position to judge whether the provision is necessary because the Treasury has not consulted on it. It has produced no evidence, and it has only a rough idea of how many schemes will be affected with a margin of about 15 per cent. either side. There is no paper that says, ''Here is the problem. This number of schemes with fewer than 50 members have gone belly up, so we need to provide this protection.'' 
 We do not know the views of the industry on this issue beyond its responses to the Finance Bill at the time of its publication. Its only response has been like mine: what is the point of the provision and why is it being introduced? Industry, and smaller schemes in particular, has not had the chance to see the evidence. Those smaller schemes will probably be the last people to know about it because they will not follow the changes to pensions legislation and the taxation of pensions as closely as some of the big schemes. This may hit them out of the blue. They may not even be aware of it because they will not have hauled through the Finance Bill clause by clause—and if they do read the explanatory notes, they will be none the wiser. 
 What the Financial Secretary said does not give me much confidence. She said that the DWP is working on the problem at the same time and coming up with a parallel scheme. She said that she hopes that there will not be much overlap, but if there is things will be changed, and the Treasury will be in close liaison with that Department. One would have thought that the 
 poor old DWP might have been consulted in advance. The almighty Treasury is once again taking over one of its remaining functions. All those Work and Pensions officials who say, ''At least we get to work on member protection—that's one piece of our territory that the Treasury haven't trampled all over,'' will suddenly find that the Chancellor's tentacles have extended. 
 The fact that the Financial Secretary assures us that the Treasury will consult the DWP is not a great reassurance. One would have thought that the Government would consult internally before introducing legislation. Of all the arguments that the Financial Secretary has advanced today, this was the area about which she seemed least confident. She said that she thought it was a good idea to keep the provision in the Bill, and if we do not need it, we can take it out. Perhaps there is an alternative approach. Let us decide over the next few months whether it is necessary, and then put it in the Bill. It could be included in the next Finance Bill, after we have decided that it is necessary and consulted on it, the Treasury has issued one of its nice consultation documents, which has had lots of responses, and the Secretary of State for Work and Pensions has received a letter from the Chancellor about it. That is how legislation should be put together. 
 We will have to vote against the provision, not because we think that it is bad, but because we are not in a position to judge whether it is good. There is time to make such changes later. Perhaps there will be more provisions on pensions in next year's Finance Bill, or in the intervening 12 months. A better approach is to remove the measure from the current Bill, consult properly, involve the DWP, develop a joined-up approach and, if it is necessary, introduce it next year. That is the way that a good Government should proceed. I shall have to press my amendment to a Division. 
 Question put, That the amendment be made:—
The Committee divided: Ayes 4, Noes 14.

Question accordingly negatived. 
 Amendments made: No. 301, in 
schedule 28, page 421, line 25, after 'that' insert '(subject to sub-paragraph (4))'. 
No. 302, in 
schedule 28, page 421, line 30, leave out '(except in excluded circumstances)'. 
No. 303, in
schedule 28, page 421, line 32, leave out sub-paragraph (4) and insert— 
 '(4) None of the following prevent the pension satisfying the condition in sub-paragraph (3)— 
 (a) if the ill-health condition is met when the member becomes entitled to the pension, the pension not being payable for a period during which the individual's physical and mental condition is no longer such as would, under the terms of the scheme, give rise to entitlement to the pension, 
 (b) a reduction in the rate of the pension which applies to all the scheme pensions being paid to or in respect of members of the pension scheme, or 
 (c) if the member becomes entitled to state retirement pension, a reduction in the rate of the pension which does not exceed the rate at which state retirement pension is payable (or, if the rate at which state retirement pension is payable is greater than the rate of the pension, the pension ceasing to be payable). 
 (4A) For the purposes of sub-paragraph (4)(c) the following constitute ''state retirement pension''— 
 (a) retirement pension under SSCBA 1992 or SSCB(NI)A 1992, and 
 (b) graduated retirement benefit under NIA 1965 or NIA(NI) 1966.'. 
No. 304, in 
schedule 28, page 422, line 2, leave out sub-paragraph (7).—[Ruth Kelly.]

George Osborne: I beg to move amendment No. 338, in
schedule 28, page 422, line 25, after 'changes', insert
'over that year or such other period not to exceed the lifetime of the policy'.
 I put my hands up and say that this may not be the best way to draft the amendment, but we did not have the resources that are available to the Government to get it absolutely right. [Hon. Members: ''Shame.''] I do not know why the hon. Member for Ealing, North is scorning me. He has his own legislation, which we are all waiting for him to introduce in the House. If he needs help in drafting his Tony Martin Bill, I am sure that we can lend him some advisers.

Stephen Pound: This is one of the rare, and possibly unique, occasions when such chuntering as there was from the socialist Benches did not originate with me. It is possible that my old university colleague, who is sitting opposite me, is paying me back for impersonating him at a union general meeting in the summer of 1979.

Richard Bacon: On a point of order, Mr. McWilliam. I was preparing for my A-levels in 1979, so the hon. Gentleman cannot be right about that.

John McWilliam: Are we being ageist again? We should be dealing with the amendment, and nothing else.

George Osborne: I concede that the amendment is a rough and ready job that probably needs the help of a parliamentary draftsman to deal with our concern that variable with-profits annuities will be prohibited by the legislation. Paragraphs 3(3), (4) and (5) of schedule 28 define annuities as level annuities, which are annuities that do not vary from year to year, increasing annuities, which increase from year to year, or annuities that are linked to the retail prices index or to
 the market value of freely marketable assets. The schedule seems to exclude with-profits annuities of the kind that are widely marketed these days.
 Someone sent me a package that one can get from the Pru. I should say that the Pru did not send it to me. I am not speaking for it or for any other life insurance company. The package is about its with-profits annuity, which is a popular product with some people. Perhaps my reading of the legislation is wrong, but it appears that the Bill will prohibit such annuities. Is that the case? If so, why? What is the problem with with-profits annuities? If they are to be banned, has the industry been consulted? What will be the impact on companies that run such products and on the people who already have them? I wanted to draw out those points with the amendment, and I would be interested to hear what the Financial Secretary has to say about them.

Ruth Kelly: I hope that I can reassure the Committee that it is not the Government's intention to prohibit the sale or purchase of with-profits annuities. Our main concern is that the member must not be able to direct the investment or determine the value of the assets with which the annuity is linked. With-profits funds, which are based on movements of the investment markets and actuaries' calculations, can be said to move by reference to an index of freely marketable assets, although a time delay may be involved. Provided that the variation is not at the member's direction and is by reference to market conditions, we would accept that such an annuity would fall within the definition of a relevant linked annuity. I hope that I have reassured the hon. Gentleman on that point and convinced him that the amendment is not needed.

George Osborne: That is reassuring. It was certainly worth tabling the amendment for that clear and unambiguous answer from the Financial Secretary.

Harry Cohen: I am interested in the way that the amendment is worded. The Financial Secretary said that there will not be a ban on selling with-profits annuities, but surely the real problem in recent years has been the exceptionally low payout on such annuities. I am amazed that the Opposition did not raise that issue. The Government should consider it as well, because it should have been made clear to people who are tied into such low-paying annuities what they were likely to get; otherwise, such sales really amount to mis-selling. Surely, the Opposition should be raising that issue.

John McWilliam: Order. The hon. Gentleman may or may not have a point, but it does not relate to the amendment.

George Osborne: I take the hon. Gentleman's point. By the way, it is one of the arguments against annuities in general. We have had lengthy debates during which he could have caught your eye, Mr. McWilliam, and made that point. We were trying to establish whether the Government were getting rid of, or making illegal,
 with-profits annuities. The Financial Secretary reassured me that that is not the case. On that basis, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

George Osborne: I beg to move amendment No. 224, in
schedule 28, page 426, line 21, after 'impairment', insert ', or
(c) has reached that age and is continuing in full-time education which commenced before the child reached that age.'.
 The amendment is to do with people in full-time education. It is a bit more than a probing amendment. It would amend the meaning of a dependant to include those in full-time education beyond the age of 23, with the important caveat that the education began before the age of 23. As I understand it, that is current Inland Revenue practice. In other words, the child remains a dependant as long as they are in continuous full-time education. That is reflected in many schemes. 
 Why are the Government changing the definition of a dependant? What will be the impact on young adults? How many people are we talking about? These days, people seem to spend longer and longer at university and college—although once the Government's new tuition fees come in they will probably leave earlier. At the moment, however, people stay in full-time education longer and longer. What impact will the change have on them and on schemes that currently define dependants as children of members, including young adults beyond the age of 23 in full-time education? Why have the Government suddenly made this change?

Ruth Kelly: The age of 23 is used because it is simple, certain and clear. The intention behind pension simplification is simplicity. The hon. Gentleman's proposal would merely add unnecessary complication to the rules. It could create problems for schemes. People would need to decide how to define full-time education and whether a child had started full-time education before the age of 23. It would create anomalies between children who started full-time education after they were 23 and those who started before they were 23, and between children who were in full-time education and those who were in part-time education, perhaps because they needed to work to support their parents.
 It is possible to make a fairly plausible case that the rules should change, but it is equally plausible—it is also straightforward, clear and provides certainty—to argue that there should be a clear cut-off age of 23. I therefore urge the hon. Gentleman to withdraw the amendment.

George Osborne: I am not adding complexity to the scheme of things. The definition already exists in current Inland Revenue rules. I have been told that it is currently within those rules that people over the age of 23 in full-time education can be classed as dependants. The Government are removing a current right and are changing an arrangement that works satisfactorily, as far as I am aware. It is not really good enough for the Financial Secretary to say, ''Well, we
 don't want to make things too complicated.'' She must explain why the Government are removing something that currently exists. Have they consulted on the matter? I do not know whether she has anything to say.

Ruth Kelly: I can certainly say that we have not received representations on this matter. Very few responses were received on this point. On the whole, people seemed to welcome the simplicity and certainty that having a cut-off age of 23 provides. As I said earlier, trying to amend the Bill in the way in which the hon. Gentleman suggests would add complexity to the administration of schemes. Therefore, I suggest that we stick with the current legislation.

George Osborne: We are not sticking with the current legislation—we are changing it through the Bill. The Financial Secretary said that she has not received many representations, but that may be because people have not spotted the provision. It struck me that many organisations have basically gone on what was in the consultation paper and the Government's assurances that nothing new was being included, but a few things are new: one is this measure and another is schemes with 50 members or fewer.
 I shall not press the amendment to a Division, but I want to put on the record that it is strange that the Government are withdrawing this right. I suppose that they are working on the assumption that when tuition fees come in very few people will be in full-time education beyond the age of 23, so it will not apply. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Amendments made: No. 305, in 
schedule 28, page 426, line 43, after 'that' insert '(subject to sub-paragraph (3A))'. 
No. 306, in 
schedule 28, page 427, line 9, leave out '(except in excluded circumstances)'. 
No. 307, in 
schedule 28, page 427, line 10, at end insert— 
 '(3A) Neither of the following prevents the pension satisfying the condition in sub-paragraph (3)— 
 (a) a reduction in the rate of the pension which applies to all the dependants' scheme pensions being paid in respect of members of the pension scheme, or 
 (b) if the dependant becomes entitled to state retirement pension, a reduction in the rate of the pension which does not exceed the rate at which state retirement pension is payable (or, if the rate at which state retirement pension is payable is greater than the rate of the pension, the pension ceasing to be payable). 
 (3B) For the purposes of sub-paragraph (3A)(b) the following constitute ''state retirement pension''— 
 (a) retirement pension under SSCBA 1992 or SSCB(NI)A 1992, and 
 (b) graduated retirement benefit under NIA 1965 or NIA(NI) 1966.'. 
No. 308, in 
schedule 28, page 427, line 14, leave out sub-paragraph (5).—[Ruth Kelly.]

Ruth Kelly: I beg to move amendment No. 309, in
schedule 28, page 427, line 32, leave out from first 'annuity''' to end of line 33 and insert
'and ''increasing annuity'' have the same meaning as in paragraph 3 and ''relevant linked annuity'' has the meaning that it would have in that paragraph if the reference to the member in sub-paragraph (6) were to the dependant.'.

John McWilliam: With this it will be convenient to discuss Government amendment No. 310.

Ruth Kelly: I have already spoken about clause 157 and the second part of schedule 28, which, as the Committee will recall, provide the rules that will apply to all dependants' pensions paid by registered pension schemes. These amendments introduce a minor change to the second part of the schedule to clarify the definition of a dependant's annuity and a dependant's short-term annuity.
 The pension rules allow the payment of an annuity when the annual amount of that annuity varies by the market value of freely marketable assets. That term is defined in respect of a member's annuity as a relevant linked annuity and in that context requires that the member must not be able to determine the value of the assets to which the annuity rate is linked. The first amendment ensures that when the definition of a member's relevant linked annuity is applied to the dependant's annuity, it is the dependant, rather than the member, who is not able to determine the market value of the freely marketable assets. 
 The second amendment ensures that the amended definition of a dependant's relevant linked annuity also applies to the dependant's short-term annuity. 
 The amendments clarify the position regarding the dependant's annuity and ensure that the dependant may not determine the amount of the annual income from the annuity. I commend them to the Committee. 
 Amendment agreed to. 
 Amendment made: No. 310, in 
schedule 28, page 428, line 8, leave out '3' and insert '17'.—[Ruth Kelly.] 
 Question proposed, That this schedule, as amended, be the Twenty-Eighth schedule to the Bill.

George Osborne: The Association of British Insurers is opposed to short-term annuities and suggested some amendments, which we did not feel that we could table in our name, but it is right to raise its concerns with the Government.
 Short-term annuities are a new development and the Government argue that they will provide additional flexibility for consumers who want to plan ahead for periods that they can foresee reasonably well. The ABI believes that the introduction of short-term annuities is unnecessary, would introduce further complexity and could leave consumers vulnerable to investment and interest rate risk and perhaps reduce the level that they are likely to achieve when they eventually purchase a lifetime annuity. The association also fears that there is a real risk of mis-selling of short-term annuities, not least because they are likely to appeal to consumers who perceive annuities to be poor value but do not have a pension pot that is large enough for income withdrawal. 
 Those points were put to us by the ABI, but we did not want to table them as amendments. However, this is probably the right place to raise the whole issue of short-term annuities with the Financial Secretary. Perhaps she could explain what is behind the Government's thinking and how they intend to address the ABI's concerns.

Ruth Kelly: I am glad that the hon. Gentleman is taking the proposition of compulsory annuities at the age of 75 seriously and that he recognises the merits in that. That is what drives the ABI's concerns on that point. Originally, when we had that debate, representations were made to me about the high charges involved in income draw-down. Limited period annuities were presented as an alternative to income draw-down. They allow people who would otherwise wish to defer annuities to the age of 75, or before that, to take out a more temporary form of annuity and to reassess their financial needs at the end of that period. That provides them with additional flexibility. When they were originally proposed in the consultation document on annuities they were widely welcomed, including—I think—by the Opposition. They are a welcome innovation as an alternative to income draw-down and show that we are listening to the demands of people who are looking for greater flexibility in their retirement fund.
 Question put and agreed to. 
 Schedule 28, as amended, agreed to.

Clause 156 - Lump sum rule

Question proposed, That the clause stand part of the Bill.

David Laws: The clause and its associated schedule introduce a simplification, codification and extension of the principle of the tax-free lump sum. As we debated this morning, not only are the Government consolidating it, but, as the Minister indicated, the measures are appreciably more generous than the previous ones. The Government have decided not only to simplify and to codify the manner in which the tax-free lump sum operates but to extend it. We have the opportunity to probe their intentions in that area before we get into the greater detail.
 I wonder whether the Minister will put on record the answer to a number of questions about the tax-free lump sum, so that we can understand how the Government's policy is developing. First, will she clarify the purpose of, and justification for, the tax-free lump sum? As we discussed this morning, the previous Chancellor described the tax-free lump sum as an ''anomaly'' within the taxation of pensions. However, the Government have chosen not only to consolidate that anomaly but to extend it. Presumably, they have considered whether there are other ways that savings, both for pensions and for other items, could be tax-advantaged. They have chosen to extend the tax-free 
 lump sum. So that we have it on the record, can we be told the Government's thinking about the purpose and justification of the tax-free lump sum? 
 Secondly, there was speculation a few years ago about whether the Government would get rid of the tax-free lump sum altogether. The Minister pooh-poohed that this morning. Notwithstanding the tendency of Treasury Ministers to be careful about the things that they say and put on the record, can we take that as confirmation that the Government are committed permanently to keeping the tax-free lump sum? 
 Thirdly, will the Government clarify why they have made the tax-free lump sum arrangements more generous in the Bill? How much additional saving for pensions do the Government anticipate will result from that? Fourthly, will the Minister clarify the current cost estimates in respect of the tax-free lump sum and how much that will increase over time as a consequence of the Bill?

Ruth Kelly: I am delighted that the hon. Gentleman has taken such an interest in the tax-free lump sum. We have decided to merge upwards for several reasons. The first is for pure simplification. We are increasing the permitted lump sum as part of a wider objective under tax-simplification proposals to merge occupational and personal pension regimes and to remove the distortions that are caused by having two different regimes. We did not want some people who currently benefit from a particular privilege to have it reduced under the simplified proposals. We decided in each case to level upwards, so that there would be practically no losers under the new regime compared with the number of winners. We are prepared to commit the Exchequer to financing that levelling-up of the legislation.
 The second point, which is highly relevant, is that the tax-free lump sum is very popular. That is not a silly point. People save in pensions partly because they know that when they retire they will have access to a tax-free lump sum, perhaps to fund a more active early retirement before they use the rest of their income as an annuity. It is an attractive element of the overall pensions regime and encourages people to use the pensions vehicle rather than a different savings vehicle.

David Laws: I understand the Financial Secretary's argument, but does she accept that any double relief of taxation is going to be popular? She may be coming to that point and perhaps I am pre-empting her argument, but so far she has not produced a justification for that particular form of double-tax relief.

Ruth Kelly: I thought that I did. I talked about committing, for every £100 saved in a pension fund, £30 in direct tax relief from the Exchequer, plus the permitted tax-free growth. As part of the bargain, we require people to buy a secured income for life at the end of that period. In order to ensure that sufficient money is saved, an additional, attractive element of pensions saving is that people are permitted to use up
 to 25 per cent. of that in a liquid form immediately on retirement. That is one of the elements that increases pension saving.
 It is virtually impossible to assess exactly what impact that has on pension saving, or how significant the boost to pension saving is. However, I am sure that if we were to abolish the tax-free lump sum, it would be severely detrimental to the overall savings environment. We do not that think that is an anomaly. We think that it is an important and attractive feature of the pensions regime. The hon. Gentleman is a braver politician than I if he is prepared to argue that that feature of the pensions regime should be abolished. 
 I said that it is impossible to separate out the costs. We have not published figures detailing how much of the additional cost of pension simplification arises from the more generous access to tax-free lump sums, but those in occupational schemes, who have not yet been able to benefit from the full 25 per cent. tax-free lump sums, will tend to benefit from our reforms. Many pensioners who do not have such a large pension pot will be able to avail themselves of the increased generosity of the Exchequer. I hope that the hon. Gentleman will welcome our proposals. 
 Question put and agreed to. 
 Clause 156 ordered to stand part of the Bill. 
 Clause 158 ordered to stand part of the Bill.

John McWilliam: We now come to a large group of Government amendments. If we are going to have any problems with the schedule, I will break for half an hour, because I have had enough.

Jim Fitzpatrick: On a point of order, Mr. McWilliam. My apologies if you were not advised of this, but it is our understanding that the Committee has informally agreed to conclude its business today at 5.30 pm. I hope that we will deal with the first group of Government amendments in the next schedule and then conclude for the day.

John McWilliam: That is fine, but I am just about at the end of my tether.Schedule 29 Registered pension schemes: authorised lump sums—supplementary

Schedule 29 - Registered pension schemes: authorised lump sums—supplementary

Ruth Kelly: I beg to move amendment No. 311, in
schedule 29, page 430, line 37, leave out
'amount which is the individual's lifetime allowance in relation to the member'
and insert 'member's lifetime allowance'.

John McWilliam: With this it will be convenient to discuss the following:
 Government amendments Nos. 312 to 314, 324 and 325 and 328 to 330.

Ruth Kelly: I hope that this set of amendments will not prove too controversial. They are intended to provide additional clarity and simplification. Some of the amendments concern clauses 207, 208 and 266, the main substance of which we shall come to later. The amendments merely introduce consistency of reference to the lifetime allowance throughout schedule 29. They provide clarity and consistency for taxpayers and pension schemes, and I commend them to the Committee.
 Amendment agreed to.

George Osborne: I beg to move amendment No. 220, in
schedule 29, page 430, line 41, leave out 'when' and insert
'on or after the day on which'.

John McWilliam: With this it will be convenient to discuss the following amendments:
 No. 225, in 
schedule 29, page 433, line 21, after 'scheme', insert 
 'together with interest at a prescribed rate,'. 
No. 226, in 
schedule 29, page 434, line 14, leave out paragraph 7 and insert— 
 '7. (1) For the purposes of this Part a lump sum is a trivial commutation lump sum if— 
 (a) on the nominated date, the value of the member's pension rights does not exceed the commutation limit, 
 (b) it is paid when all or part of the amount which is the individual's lifetime allowance in relation to the member is available, 
 (c) it extinguishes the member's entitlement to benefits under the pension scheme, and 
 (d) it is paid when the member has reached the normal minimum pension age but has not reached the age of 80. 
 (2) The nominated date is any day after the member has reached the normal minimum pension age but has not reached the age of 80 nominated by the member or by the scheme administrator (provided the scheme administrator has given the member at least one month's written notice of the intention to nominate a date and the member has not objected in writing before that date). 
 (3) The commutation limit is 1 per cent. of the standard lifetime allowance on the nominated date. 
 (4) The value of the member's pension rights on the nominated date is the aggregate of— 
 (a) the value of the member's relevant crystallised pension rights on that date (calculated in accordance with paragraph 8), and 
 (b) the value of the member's uncrystallised rights on that date (calculated in accordance with paragraph 9).'.

George Osborne: Although grouped, the amendments deal with different issues, which I will go through in turn. Amendment No. 220 is a typographical change to achieve what we believe the Government mean to achieve with pension commencement lump sums. That is to say that a pension commencement lump sum be payable not earlier than the normal minimum pension age being reached or, if earlier, on the ill-health condition being satisfied.
 The use of ''when'' implies a precise timing at normal minimum pension age and no other time, which is clearly not intended. One of our tax lawyers picked up on that point, saying that it was better to have ''on or after'' than ''when''. Since those people 
 seem to make large sums of money arguing such points, I think I might save people some money if the Government amend the Bill. 
 Amendment No. 225 deals with the short service refund. It is normally paid when an individual has been a member of a scheme for less than two years. It is common for the member's contribution—less, if the scheme was contracted out, the cost of buying back his second state pension rights—to be repaid with interest net of tax. The amendment is designed to reflect that common practice and to avoid a tax charge because of the payment of interest. 
 Amendment No. 226 is more substantial and addresses trivial commutation. I wonder whether the Government will be the victims of unintended consequences. They seem to be introducing a new rule whereby an individual can commute trivial sums up to 1 per cent. of their lifetime allowance. It seems relatively simple for people to commute very small pensions. Some people have very small pensions that pay out, and that is not satisfactory for all concerned. However, the onus seems to be shifting from a decision by the scheme to commute trivial sums that it finds difficult and costly to administer to a decision by the member. Just because an individual has several other trivial sums that have been commuted over their lifetime, a scheme might find itself paying out only 50p a month. 
 The measure represents a shift, because there are schemes with very large numbers of individuals with very small sums. In the past, schemes have been able to commute those sums and save large sums on their administration. Under the proposed system, the 1 per cent. of the lifetime allowance may be exceeded and the individual may choose not to commute their trivial 
 sum. As I understand it, the decision is now for the member rather than the scheme. Schemes may not be able to contact members for their approval. 
 Most of the representative bodies to which I have spoken are greatly concerned because they think that the provision will have unintended consequences and lead to huge extra administrative costs for certain schemes. 
 I do not know whether the Financial Secretary has spotted it—there has apparently been little conversation between her Department and the Department for Work and Pensions—but there is a direct link to the calculation of the flat-rate levy for the pension protection fund. For example, if someone has a pension that only pays 50p a month, the scheme may have to pay £10 extra on the pension protection fund levy because that levy is calculated per member. Therefore, there could be a very substantial cost impact on schemes that consist of large numbers of trivial sums. The industry raised that point with us—it cropped up in almost every conversation I had—and it is worth bringing it to the Committee's attention. 
 My amendment is designed to deal with one final point. There seems to be an inconsistency regarding the age at which one can receive a trivial commuted sum. Although from 2010 pensions will be paid from the age of 55, trivially commuted sums will not be payable until the age of 60. Why is the age of 60 suddenly used? It is not used elsewhere in the Bill, and it seems strange that it has just appeared. When the Financial Secretary responds, perhaps she will deal with that point. 
Debate adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at twenty-seven minutes past Five o'clock till Tuesday 15 June at half-past Nine o'clock.